We must’ve heard multiple stories about people investing in XYZ stocks ten years back and forgetting about them, which eventually turned into millions of bucks currently. Although this seems to be a fairytale story, it does not necessarily mean that this will always hold true. Several companies went bust, and investing in those would have only wiped out the capital. That being stated, investments meant for the long term in fundamentally good companies ultimately yield the best results. And this is true across financial markets for all asset classes.
Although investing and forgetting can be a good process, one should ideally be holding fundamentally good assets. And this requires a good amount of research and a decent amount of luck.
The best way to build wealth in the long term is to follow a disciplined approach to investing. Setting up a systematic investment plan or SIP is an incredibly powerful tool to build the discipline required to build long-term wealth. Investing a fixed amount every month would save you the hassle of timing the markets, as it effectively allows you to do dollar-cost-averaging. Staying invested over a period would allow the power of compounding to take its effect and ultimately help you grow your wealth. However, this is not as simple for the crypto market as it is for the stock market. In the case of stock markets, there are mutual fund houses where fund managers are responsible for generating returns. In the case of the crypto market, there are limited options for retail investors.
Doing your research and diversifying your crypto investments will help investors grow their wealth over time. There are certain factors to keep in mind while investing for the long term.
The first step would be to invest across a theme and pick multiple coins in that theme. As time goes by, the disposable income would likely increase provided the other things remain constant. Once the disposable income increases, one could consider increasing the periodic investments. It ensures a steady growth in your capital and the effect of compounding.
Building wealth is like running a marathon that goes a long way, unlike a short sprint. Reinvesting the profits would be multiple times better than taking out profits.
‘Invest and forget’ is not a prudent way to build long-term wealth. When we talk about investing in crypto, people often forget that there are so many assets that went bust. Investing in Bitcoin and Ethereum in 2018 would have given multifold returns on these investments. However, one needs to understand that these are fundamentally strong tokens. Investors need to do proper due diligence to land such gems as there could be several that are still relatively unknown and are undervalued.
Investing in Ripple in 2018 at $3.31 and forgetting it would have given a negative 67% returns to investors. At the same time, investing in ETH in 2018 at $800 and forgetting it would have given almost 500% returns. The key is diversifying the investments across asset classes and within the same asset class.
Forgetting an investment suggests that one would hope the investment to go up in value. However, more often than not, this strategy would not work in the long term. Being diligent about your investments and keeping a tab would ensure building wealth in the long term.
(The author is CEO and Co-founder of Mudrex- A Global Algorithm Based Crypto Investment Platform)
(Cryptocurrencies are unregulated assets in India. They are highly volatile and investing in them without due diligence may lead to losses. Any advice or suggestion provided in the article is that of the author. Pelase consult your financial advisor before investing in crypto. The Government of India is expected to introduce a bill to regulate crypto assets and exchanges soon.)