Investing In Digital Assets Effectively Through Traditional Strategies
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It goes without saying that investing is a proven method to achieve long-term wealth creation and preservation. It is a core principle that should be part of everyone’s personal finance journey, because quite simply, you need your money to work hard for you over an extended period of time to achieve financial freedom. 

In my experience as a certified financial charterholder, the most burning question asked by those who are just starting their investment journey is simply: what should I invest in?

It is a deceptively simple question, and to be honest, there is no single answer to it. That’s because every individual investor should have his or her own investment plan that’s tailored to suit their risk tolerance and investment goals. That said, there are two strategies that every investor should learn which will help them in their investment adventure.

Diversify Your Investments

The first is the concept of diversification, and the art of diversifying your investments. Diversification is the process of investing in a mix of different asset classes to build a well-balanced portfolio. Ever heard of the old adage, “don’t put all your eggs in one basket”? Yup, the reasoning is exactly the same.

By diversifying your investments across asset classes such as equities (or stocks), bonds, properties, commodities, and cryptocurrencies, your investment risk is spread over multiple asset classes so that in the event one part of your portfolio performs poorly, the impact to the overall portfolio’s performance is minimised. In other words, if one investment doesn’t do well, you would want the other parts of your portfolio to “hold the fort” – you don’t want all your investments to have high correlation to one another.

Digital Assets and Diversification

Cryptocurrencies

Today, when most people think about investment asset classes, it has expanded beyond traditional assets like stocks and properties. Newer asset classes, especially digital assets, have continued to become more widely adopted as alternative assets, which has attracted the younger generation of investors in particular. This group of tech-savvy investors have taken notice of the exceptional returns of digital assets such as Bitcoin, which has been the best-performing asset over the past decade, and are willing to brave the high levels of volatility that digital assets are currently known for in order to potentially earn higher returns compared to traditional asset classes. 

The main reason behind the interest in digital assets is in their potential utility value in the future through potentially game-changing technologies such as blockchain technology, smart contracts, non-fungible tokens (NFT), and more. Nevertheless, it is likely that it is not just young investors who have dipped their toes in this space – it is estimated that there are around 295 million people globally who are currently invested in digital assets.

Data shared by Luno Malaysia in its 2021 recap

This trend is also seen in Malaysia, where we are seeing a growing number of digital asset investors. Luno, the leading regulated digital asset exchange in Malaysia, saw a user growth rate of more than three times from 2020 to 2021, rising from around 180,000 users in 2020 to more than 600,000 customers in 2021. This indicates that more investors are turning to digital assets as another asset class to invest in (and hopefully for better portfolio diversification), and it is highly likely that the number of digital asset investors in Malaysia will continue to grow as public awareness of digital assets increases.

What makes digital assets useful as a diversification tool is their general low correlation to other assets in the market. This means that having digital assets in an investment portfolio may result in higher risk-adjusted returns. However, given its high level of volatility, it is generally not wise to allocate a high amount of digital assets in an investment portfolio. Instead, by mixing in a small percentage of digital assets, we can increase the potential annualised returns while still maintaining a manageable annualised volatility of the overall portfolio – thus tapping into the potential high gains of digital assets without substantially increasing the portfolio’s risk. 

On a related note, diversification can also be done within your digital asset portfolio. This can be straightforward or fairly complex, depending on how much exposure you wish to have in the digital asset space and your risk tolerance. It can be as simple as investing in the “blue chips” like Bitcoin and Ether, or a wide mix of digital assets that encompasses various tokens and even NFTs. 

Don’t Just Buy The Dips – DCA Is The Way

An illustration of how DCA is a more effective strategy than buying lump-sum (via RinggitPlus Academy)

The other investment strategy is called Dollar-Cost Averaging (DCA). This strategy involves buying fixed amounts of a particular asset on a regular schedule, regardless of its price. This means you purchase more of the asset when prices are low and less when prices are high, but always at the same currency amount. This takes emotion out of the investment equation, and lets you ride out large price fluctuations while maintaining the act of accumulation of the particular asset.

DCA is a time-proven strategy that allows you to take advantage of volatile price movements in a much more effective way than to just “buy the dips”. In the digital asset market, it is fairly common for bull or bear markets to last over a prolonged period, and DCA helps you stay disciplined in both scenarios – you will not get tempted to invest more in a bull market when prices are high, and in a bear market, you will have funds to spare to accumulate more of the asset when prices are low.

Always Stick to the Basics

But of course, like any other asset class, you must always do your research before investing in digital assets. The risk of capital loss is much higher due to the inherent volatility of the market. Further, a digital asset that is lower in price does not necessarily mean it can potentially yield higher returns, so do take some time to research on the asset you are interested to invest in, and find out its potential utility in the real world – which is the key to its future value. 

The goal of any investment is to gain a high return over the long term, so make sure you choose the right assets to invest in, both digital and traditional. Additionally, you can consult with a licensed financial planner for detailed advice on digital assets as an investment option and your optimal investment portfolio based on your financial goals and risk tolerance. Finally, regardless of which option you choose, only invest what you can afford and don’t over-stretch yourself financially.

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