The current violent changes in the cryptocurrency world, and in Bitcoin in particular, are a potent reminder of the need for diversification in investing and wealth management.
There are 3 main categories of diversification and they provide the best defense against market volatility when used together over a sustained length of time.
Timing the market is the surest way to either win big or lose big. Get it right and you bought in at historic lows and made a fortune on the recovery. Get it wrong and you bought Lehman Brothers just before they went belly up.
The easiest way to beat the risk of market timing is to drip feed funds into the market regularly and at high frequency over time. The stock market has delivered roughly 10% returns per year (before inflation) but that average return hides the fact that there is often tremendous volatility year by year. Below is a chart from The Balance showing how these broad swings iron out over time:
The concept of dollar-cost averaging is pretty straightforward but can be difficult to implement, especially over 20 or 30 years. People are not very good at keeping to small, repetitive, sometimes complex behaviors over time — we are very easily distracted. The best way to do this is to use technology to automate and take the human out of, which increases your regular contribution over time as your funds allow and harnesses the awesome power of compounding growth. Fintechs like Unifimoney have made the strategy of dollar-cost averaging more simple than ever.
Diversifying your assets is another powerful tool for diversification. Putting all your funds in cryptocurrency could pay off but that degree of risk is not something most people are comfortable with. Everyone's situation is different, for sure, and it changes over time. A 25-year-old software engineer at Google with no dependents is going to have a very different perspective to a 50-year-old divorcee with children to support. Different asset classes perform differently depending on macro-market conditions.
In this article, the relative relationship between stock-market crashes and the gold price is shown in the table below:
While precious metals may not be to everyone’s taste, families also diversify their assets through property, different investing asset classes e.g. bonds vs ETFs and alternative assets. All tend to behave differently to macro-economic changes. What the appropriate allocation is between such classes is going to be a decision specific to that person's own situation — there is risk inherent in investing, so diversification is all about calibrating your holdings to your personal risk tolerance.
So, you started young, have been dollar-cost averaging and have a diversified asset allocation, but all your equity investments are in a single stock. If that stock was Amazon, good for you! You can probably retire. If you were invested in Enron, though, you are most likely going to need to keep working a lot longer than you thought. This is why being diversified within asset classes can also potentially be important.
Holdings-based diversity can be quite easy to achieve — for example, in stocks, you can buy very diversified ETFs that will provide you with diversification in a single holding. In crypto, we have not yet seen mainstream vehicles to achieve this, so you have to do it manually. In time, the market will mature more and such blended investments will become available. For now, we’ve made a point to offer 34 cryptocurrencies within the Unifimoney app to allow users the tools to diversify within the burgeoning class.
As you can probably see, these strategies are not mutually exclusive. Instead, they’re complimentary. Used together in whatever combination your personal circumstances and risk profile suggest, they can provide a long-term strategy against unexpected market shocks and changes. You may not get the highest possible returns but your risk of getting low or no returns is substantially reduced. We’ve built Unifimoney to make Time-Based, Asset-Based, and Holding-Based Diversification as simple and intuitive as possible.
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The above does NOT constitute an offer, solicitation of an offer, nor advice to buy or sell specific securities. The opinions listed above are not the opinions of Unifimoney Inc. or Unifimoney RIA, Inc. but represent the opinions of independent contributors. These contributors may or may not hold positions in the stocks discussed. Investors should always independently research any stocks listed and form their own opinions, while recognizing that any investments made may lose value, are not bank guaranteed and are not FDIC insured.