In the previous write-up, we discussed the importance of early and regular investing. Now, let’s dive into another crucial aspect: investing a meaningful amount. What does this really mean?
A Real-Life Example: Mia’s Investment Journey
Consider your colleague Mia, who recently set up a cryptocurrency account. She transferred $100 into the account, and overnight, her investment appreciated by 4.74% (specifically, Ethereum on September 19, 2024). This impressive return quickly became a hot topic of conversation at work, earning Mia some envious glances. In absolute terms, however, the profit isn’t life-changing—it’s just $4.74!
Yet, it’s easy to get carried away with excitement. Many of her colleagues might be thinking, “What if I could achieve even 10% of that return every day? That could lead to approximately a 125% return over the year! How fabulous!”
The Bigger Picture: Mia’s Savings
Mia has been working for a few years and has saved up about $30,000 in her bank account, earning a modest interest of 3% per annum. Over a year, this would yield a return of $900. In contrast, her $100 investment in Ethereum generated $4.74 overnight. If only Mia had invested her entire savings in ETH! Her corpus could have doubled! Or could it?
The Reality of Investment Volatility
Like almost every asset price, Ethereum (ETH) is highly volatile. Its value can fluctuate significantly in either direction. For instance, if we look at the performance of ETH over the past six months, we see that its price has experienced severe drops before beginning to recover.
With this volatility in mind, would it have been wise for Mia to invest all her money in ETH? Let’s explore some important lessons from this scenario:
Key Takeaways
- Small Investments Don’t Move the Needle: A small investment that generates high returns doesn’t significantly impact overall wealth. For example, a $125 profit on a $30,000 corpus is relatively underwhelming. In fact, an incremental increase of just 1% per year on that overall corpus would yield $300—almost 2.5 times the gain from Mia’s “wonder” investment.
- The Importance of Diversification: While risky investments can yield outsized returns, it’s crucial to remember that without foresight (a crystal ball), you should avoid putting all your eggs in one basket. Diversifying your investments across various asset classes can help mitigate risks and stabilize returns.
- Focus on Overall Portfolio Growth: Once you’ve decided on an investment portfolio strategy, it’s essential to allocate your entire investable corpus accordingly—cash included. Individual wins and losses matter less than the overall growth of your portfolio when considering the risks associated with your investment choices.
Looking Ahead: Building Your Portfolio
In our next discussion, we will explore how to start creating a well-rounded investment portfolio tailored to your financial goals and risk tolerance. And for those who haven’t yet started investing—what are you waiting for? The sooner you begin your investment journey, the better positioned you’ll be for long-term financial success!
