In the investment world, diversification is a buzzword that you’re likely to hear every day of the week.
There’s a reason for that: Many smart investors look at their portfolio as a whole, not just as a bunch of unrelated assets. By doing this, they can take a nuanced viewpoint which allows them to make rational decisions about where to put their money and where to keep the money.
And if there is one thing that you really need, it is to make rational decisions in your investing.
Emotional decisions often cause people to make decisions that they regret, and regret is the last thing that you want to feel about your investment decisions.
With this in mind, diversification helps to provide stability for an investment portfolio so that if something happens to one particular investment (stock, bond, real estate property, etc.) that causes the value to tank, that one asset’s decline doesn’t erase all gains in the overall portfolio.
You can think of diversification as having a contingency plan in place so that if something unexpected happens, your overall portfolio remains strong.
It’s exactly this “contingency plan” thinking that has caused many investors to decide to diversify with cryptocurrencies in the first place.
Smart investors will tell you not to put all of your eggs into one basket. In fact, Nobel Prize-winning economist Harry Markowitz famously said:
“Diversification is the only free lunch in investing.”
In other words, don’t invest only into one asset type! Don’t invest only in real estate, don’t invest only into debt (government or corporate), etc. I recently wrote a detailed explainer about crypto diversification:
Crypto has been the fastest-growing asset class on the planet for well over a decade now. That is the main reason so many investors are diversifying with cryptocurrencies. Its massive growth potential makes ever having enough to retire possible.
So why am I writing about it AGAIN? It’s that important!
Obviously, if you ever hope to retire comfortably, you’ll want to also include assets with strong upside potential…just like cryptocurrencies.
And more and more investors have come to the conclusion that diversifying their savings with cryptocurrencies is a smart thing to do. As you might expect, I agree with them!
Ah, growth. That “magic” word in investing… as long as you don’t forget stability. Because remember, as investing guru Dr. William Bernstein reminds us, in investing “risk and return are joined at the hip.” Furthermore:
If you don’t understand that risk and return joined at the hip, you’re going to have problems from the get go.
High growth potential also means volatility, big price swings up and down. There’s no way around it. But when you diversify with both high-volatility and low-volatility assets, something magic happens.
That’s not an exaggeration! The Securities and Exchange Commission (SEC) explicitly says diversification is “magic…”
The Magic of Diversification. The practice of spreading money among different investments to reduce risk is known as diversification. By picking the right group of investments, you may be able to limit your losses and reduce the fluctuations of investment returns without sacrificing too much potential gain.
A little more from the SEC’s guide to asset allocation, diversification and rebalancing:
In addition, asset allocation is important because it has major impact on whether you will meet your financial goal. If you don’t include enough risk in your portfolio, your investments may not earn a large enough return to meet your goal… On the other hand, if you include too much risk in your portfolio, the money for your goal may not be there when you need it. A portfolio heavily weighted in [high-volatility assets], for instance, would be inappropriate for a short-term goal, such as saving for a family’s summer vacation. [emphasis added]
Now, there are a number of other reasons to diversify your savings with cryptocurrencies:
- Inflation resistance
- Government independence
- Privacy
- Instant, international transactions
- Exciting current and future applications
…etc. and so on. (You probably don’t want to sit through another lecture on the benefits of cryptocurrencies.) But let’s be perfectly clear! The main draw of crypto as an asset class is potential growth.
So, many people, including hedge funds, central banks, private equity funds (and smart investors) are diversifying into cryptocurrencies for these benefits. Others couldn’t care less about the particular benefits of cryptocurrencies as an asset class, because they’re much more focused on the role cryptocurrency plays within their own savings.
Some people, though, are more risk averse than others. These people, while they like the growth potential that cryptocurrencies offer, are concerned about the volatility that cryptocurrencies sometimes show in the short term.
And it’s this concern over volatility in the short term that can keep those folks from taking advantage of the proven long term growth potential of cryptocurrency investing.
How to have your cake (and eat it, too)
Now, I’m not suggesting that what I’m about to talk about will eliminate all risk of cryptocurrencies. It won’t. Because, again, “risk and reward are joined at the hip.”
Nothing eliminates all risk in life, and it’s the possibility of loss which makes growth potential possible.
Those concepts are two sides of the same coin. A zero-risk asset won’t grow. There’s no reward without risk (unfortunately, there IS the opposite, reward-free risk…)
However, there is a way to manage the risk so that you can have your cake and eat it, too.
To access the growth potential of cryptocurrency investing while reducing the overall risk to your portfolio of volatility, diversify within cryptocurrencies.
What do I mean?
Just like you wouldn’t buy one real estate property and, then, say to yourself, “Well, I’m done with all of my investing,” I recommend that you don’t invest everything into just one cryptocurrency and stop there. That’s suboptimal diversification.
No, you’ll want to spread our cryptocurrency investments across several of them (just like you’d buy several different investment properties and not just one).
I’m not the only person who thinks diversifying in your cryptocurrency portfolio is a good idea. James Hunt with The Block writes,
Winding back to 2004, search was the dominant business for those wanting to invest in the internet post the dot-com crash, and Google was king, [Bitwise Chief Investment Officer Matt] Hougan recalled. “You could have said: The internet is going to be massive. I’m going to buy the dominant player in its most dominant market,” he wrote. “This would have been a great strategy. Over the past 20 years, Google is up 6,309%.”
However, the internet is a general-purpose technology, used for many things beyond search, such as retail, video, and B2B software. So, in 2004, instead of just buying Google, investors could have also bought the leader in each of these verticals – Amazon, Netflix, and Salesforce – Hougan said.
Hougan’s comparison here is that, 20 years ago, Google looked like bitcoin. Smart money is investing in bitcoin right now. But smarter money is investing in bitcoin and other cryptocurrencies at the same time. Taking advantage of the SEC’s “magic of diversification.”
Because that’s how you can both maximize potential returns while minimizing potential risks. Diversification really is the only free lunch in investing!
If this makes sense to you, too, then I strongly recommend you open your very own Digital IRA right now. The ten or so minutes you’ll spend to create your account might shave decades off your retirement date! That’s the power of cryptocurrency, and the power of diversification in action.
If you’re not sure whether cryptocurrency is right for you, we can help! First, grab your free Essential Guide to Digital IRAs and start on your due diligence. And remember, our Digital Currency Specialists are standing by to help any questions you have. Just call 1 (800) 299-1567.
