Welcome back to my series on how to come out of the current Crypto mess a little bit wiser, a little less broke and well placed to ride the comeback. Today’s piece is on the basics of your investment strategy. This series is for those of you who jumped into the market without a plan or who want to make sure they have some basics down pat.
Of course you have an investment strategy. You wouldn’t be reading this if you didn’t have some kind of idea as to what you are trying to do. The question is, are you creating that strategy based on hard data, gut feeling or random chance?
To be clear, I don’t have any skin in the game. These principles work for cryptocurrencies, bank stocks, mutual funds or even your cousin’s perpetual motion machine.
I’m not an investment councillor, this is about following common sense principles, and I would suggest you speak with your financial advisor before making any decisions.
The series focuses on crypto because we are interested in it, we get a lot of folks asking about it and frankly, it’s exciting to talk about.
What’s your target? ROI and you
The key to making the right choices is having good information. We’ll stick to crypto and go through the steps you need to take, in my humble opinion to stay sane and profit in the long term.
The easiest way to see if you are winning or losing is the fundamental metric of metrics. Return on Investment (ROI). ROI is everything. It doesn’t have to be high, and in tradtional investing a 5-7% appreciation is considered pretty good. 10-12% is considered beating the market.
That’s not what crypto looked like. It was paying out like a slot machine with 400% gains. It’s up to you to chase that mirage all you want, and unless you luck out, it likely won’t happen to you again.
Thanks to all the suck- um, investors piling in with no plan, and no market knowledge other than what they read on twitter, the market exploded in a mass of Fear of Missing Out (FOMO). It became a textbook example of a Greater Fool Theory in action.
Sidebar: Greater Fool Theory
When the price of something is not tied to its ‘actual’ or intrinsic value but instead is blown up due to expectation and irrational beliefs of the market, it will continue to climb so long as a rational buyer can justify buying at unhinged levels, because there’s a large pool of even bigger suckers who will buy at even higher prices.
When the market runs out of ‘greater fools’… Crash.
Stay on Target…
So a real long-term savvy investor should aim for 5-10% monthly return, while taking advantage of major market distortions or events.
To find your ROI target is pretty simple. Looking at the entire crypto market the actual return rate was about 4.9%/monthly. Even with the market growing from $5.5B in on Jan 1, 2015 to $18B on Jan.1 2017.
It means if the pattern continues you can set an ROI of about 5% with conservative core crypto stocks. A good return without overextending yourself with risky picks.
Note: I’ve edited this piece to make it clear this is an informational sort of thingie, and not me telling you to go and actually buy anything.
Tomorrow in part III – Risk management, building a safer crypto portfolio