In or out of crypto, it’s safe to say it hasn’t been the easiest of years for investors. And, with all the recent events in the crypto industry, you may be wondering now more than ever how to protect your hard-earned investment money.
In the ideal scenario, investing is a powerful way to help you meet your financial goals and shield long-term savings. But - and this holds doubly and triply for crypto - it also has a way of punishing the inexperienced, the uninformed and the cavalier.
In this guide, let’s get back to basics and cover seven essential steps for good investing.
While this article is intended to be helpful, it is not advice. For personal recommendations, talk to a financial advisor.
1. Find your investment goals
More than two thirds of Brits are investing for a comfortable retirement. But that’s not the only motivation out there. Perhaps you want to buy a home, start a business or travel around the world. As you set about your investment journey, it’s important to figure out exactly what your financial goals are. This will then help you determine how much time you have, how much money you’ll need, how much risk you can take on and how aggressively you invest.
For example, maybe your investment goal is to save £40,000 for a house deposit in seven years. If you can afford to put aside £400 a month, then you’d need to invest enough money to make an extra £6,400. This is the backbone of your entire strategy. As the adage goes, keep your eyes on the prize.
Some people will have a range of goals, such as a big holiday in two years, a house in seven years plus a retirement income in 45 years. Factor in all these aims as you build your plan.
Bear in mind that within this sort of framework, crypto is generally viewed as an aggressive, high-risk/high-reward investment: it could net you a big return in a comparatively short time, but you should also be willing and prepared to lose all your money.
2. Embrace your risk tolerance
Speaking of which, your risk tolerance is nothing to do with how much you enjoy adrenaline sports or how much of a daredevil you are when it comes to eating a jar of chilis. It’s about how you’d feel investing in a volatile economic environment.
If the idea of your money plunging and soaring from one month to the next makes your stomach churn, avoid risky investments. These could include high-yield bonds (previously known as ‘junk bonds’ due to their poor credit ratings), start-ups and most types of crypto assets.
Risk tolerance is especially important for crypto investors to consider. These assets are relatively new, and we’re still discovering how they react. So far – but not always - they seem to be one of the more volatile asset classes. Depending on your own risk tolerance, this could be either a good or bad thing. Some people - especially younger investors with more time, less money and more aggressive wealth-building goals - enjoy the rapid return potential and the chance to buy at low prices. They’re happy to engage in a high-risk, high-return scenario.
Others prefer to opt for less risky investments - especially if they’re in a position where they have no real need to take on that level of risk, perhaps already having sufficient wealth to meet their financial goals, or preferring lower but more reliable returns.
With cryptocurrency, you also have to remember that you must answer some risk questions that are specific to crypto itself: how will you store your crypto securely? How do you do your due diligence on crypto providers? How do you establish the value of a cryptocurrency in the first place?
Tip: One way to avoid erratic performance is by investing little and often, a tactic known as pound-cost averaging. Over time, this should help to smooth out performance and alleviate some stress.
3. Figure out how much time your investments will have
The rule of thumb of investment is that the more time you have, the more risk you can take. Pension providers, for example, will usually put the money of young workers into higher-risk assets. And then, as decades go on, they will slowly move the wealth into less risky and more liquid investments.
Traditionally, people who are investing for more than ten years would have around 60% stocks and 40% bonds. While people with less than ten years would invest in 60% bonds and 40% stocks. But that’s changing now! Increasingly, investors will need to combine a mix of assets and pursue more active investment strategies.
If you need your money within the next five years, experts recommend simply putting it into a savings account. Although it’s not an ideal solution, investing over shorter timeframes is risky. There is less chance for returns and more chance for losses.
4. Build your investment portfolio with care
Good investment portfolios are made up of different building blocks. Known as asset classes, these include stocks, bonds, funds, alternative assets, commodities, and property. Crypto falls into the category of alternative assets, although it is rapidly emerging as an asset class all of its own.
As you might expect, each of these asset classes behaves differently, depending on the economic environment.
To avoid putting all your eggs in one basket, it’s generally recommended to have a mix of all these different asset classes in your portfolio. How you blend them together is completely up to you. But you will want to diversify to give yourself as much chance as possible of weathering any economic environment.
5. Diversify your income stream
One of the hallmarks of modern portfolio theory is known as diversification. It means that investors should get their returns from different (or diverse) sources of income. Some novice investors think this means just picking investments with different asset classes, locations, or sectors.
But if the money is coming from the same place, it’s not diversified. Alternative assets, such as gold, fine wine, art, derivatives, private equity, or crypto assets can help to diversify portfolios. This is primarily due to the concept of non-correlation: the idea that you invest in assets that perform well in different contexts so that you’re hardly ever in a situation where your whole portfolio is going up, or your whole portfolio is going down.
If you’re looking into crypto, it can be helpful to think about how your choice of coin or assets gets its value, and what kind of other people are investing in it. If you think that the same group of people invest in crypto as the general stock market, the income stream may not be as diverse as you’d hope for! For the best diversification, aim for assets which have entirely different ways of generating revenue.
There are some digital coins, for example, that investors earn from exercising, data-sharing or gaming. So, if they lose their job in a recession, they may still be able to earn coins and the risk of a mass sell-off could decrease. This is one example of an alternative income stream, but there are many!
Also, in crypto specifically, diversification isn’t just about what you invest in, it’s also about how you diversify and spread risk in how you hold it. As just one example, you might prefer to keep a significant portion of your long-term cryptoassets in cold storage, and another chunk in your own personal custody in a more convenient mobile wallet, while entrusting small amounts of trading money to different carefully selected crypto custodian platforms you personally trust.
6. Past performances don’t mean future returns
Every company has a lifecycle, it will grow, soar, and decline. Just look at mega brands like Blockbuster and Kodak. In the nineties, they ruled the malls, today they are defunct. Or more recently, Debenhams, which went from being the jewel in every shopping centre to an empty husk in just a few years.
Just because something has done well in the past, it doesn’t mean that it will forever. Likewise, if something has always done badly, that doesn’t mean that it will next quarter.
This is why doing your own research is so very important. Look at the board of directors, the philosophy of the company, how competitive it is and any new products. When you invest, think in terms of decades. Will this company still be going strong when you hand in your retirement notice? And what other sectors are likely to thrive? Are these companies using green and sustainable methods to make a profit? How do they treat their staff?
For crypto, look at the future trends. Investigate how the coin was made, where it’s headed and the philosophy of its investors. What use case does it - or could it - fulfil? Where does it - or could it - generate revenue? What do you think will be left standing in 10 years’ time? What crypto value proposition do you believe in? For more tips on investing in crypto, check out our helpful checklist.
7. Fully understand what you’re investing in
Investing is a big commitment, so make sure you fully understand what you’re buying before taking the plunge. After all, we wouldn’t buy a holiday, car, or smartphone without checking out some important details first.
Before diving into crypto, make sure you understand that it is generally not asset-backed. What’s more, regulations are a grey area. Only buy from platforms you trust, and if in doubt, contact us. You can find lots of helpful information on our blog.
Make sure you understand what projects or companies you are buying into, what they do and how they will use the money. Also, think about the impact you want to have on the world. Some companies may use your money to do things you don’t believe in, for example, to drill for oil, do animal testing or sell weaponry. It’s your money, so this is the time to make it count! At Zumo, we are doing our bit to decarbonise crypto.
Ready to get started?
Crypto investments can be a valuable part of a diversified portfolio. If you’re ready to buy some coins, getting started is easy with our handy mobile app.