Legendary investor Howard Marks has publicly stated that selling an asset (even at a profit) can be foolish. His justification for this assertion is that although profit-taking has never gone bust, selling an investment interrupts compound interest and can cause it to lose excess performance. Let's see why this sentiment is true and how it can help you in the long run.
For decades, the belief that "buy low and sell high" to be profitable at the time of investing has prevailed. Time to retire that sentence.
Compound Interest: Is It Really That Powerful?
Now, you've probably heard the saying that compound interest is the eighth wonder of the planet, and there's a good reason for that premise. Compound interest plays with momentum and is responsible for virtually all investment success. If you've ever seen your favorite team score the game-winning goal in the last ten minutes after losing the entire match, then you know that momentum has a fun way to lead a team to success, as does investment.
Let's explain this with a simple example:
There are two options available to you. Every day, for a period of time, you can receive a dollar or receive a single penny that will double its value, which would you choose? You may be inclined to go with the dollar option, after all, it's worth 100 times more than a penny. It seems the logical choice. But consider that on the 12th, the person who chooses the dollar will have €12 and the person who chooses the penny will have €20,48.
This is the magic of compound interest.
Now that you know how powerful compounding is, you can see why pausing compounding isn't ideal.
Does this mean that you should never sell an investment?
Marks says there are two situations when you should sell: either there is a better investment opportunity, or when the reason you invested in something is no longer true.
For example, if you invested in a stock that used to bring in a lot of income but has now stopped making that money, or if the business is facing legal problems that could bring it down, then you should consider selling. The same is true if you discover a much better investment, known as the opportunity cost or the cost of missing an opportunity. In addition to these two main reasons, Marks believes that selling for any other reason does more harm than good.
But trading an asset can't be that detrimental to investment returns, can it?
If he can. A study was conducted on the S&P 500 (an index of the top 500 US stocks) and its performance profile from 1996 to 2015.
It found that, on average, the S&P 500 has returned +8,2% year over year for 19 consecutive years. To put that into perspective, if you invested €1,000 in 1996, it would be worth €4,469 in 2015 or a +347% return.
The study then looked in more detail at the effects of missing out on the best trading days in the market due to people trying to trade and not just invest and hold.
What they found was amazing.
In the chart above, you can see that if you missed the top 10 trading days because you were trying to time the market, your returns dropped to just +4.5% per year. This means that you have realized less than half of the return on your €1000 investment (for a total of €2307). Missing out on the top 20 trading days means your returns are only +2,1% per year, a loss of another €2987. Finally, by missing the best 40 days, you actually lost -2% per year for 19 years, leaving you with €681 at the end of the period instead of €4,469 just for standing.
This study demonstrates the power of long-term overtrade investing.
So the question becomes: Do you think trying to trade the markets is worth the risk if it means losing most of the potential return on your investment?
What does this mean to me?
The cryptocurrency market is just like any other financial market. The main difference is that historical returns are higher over most comparable time periods and price fluctuations, also known as volatility or risk, are higher, but this makes it even more difficult to attempt to trade and time the best points of purchase and sale.
But if you take a long-term view and look at the big picture, the crypto market shows a clear trend and the benefits are well worth the added risk.
As seen above, the cryptocurrency market, represented here by Bitcoin, follows a clear trend. If you try to change it overnight, it can become a costly mistake and you could miss out on incredible returns that add up over time.
How do you know what to invest in long term?
Nobody knows with 100% certainty which investment will be the best in the long run, but you can use a trick that almost all investors use: diversification. The old adage of not putting all your eggs in exactly the same basket.
Diversification accomplishes two things:
As Chris Beamish, an investment analyst at Revix, likes to say: “Investing in cryptocurrencies is like investing in the internet in the 90s.
Innovative early-stage technology has been a great investment opportunity, as the world has clearly seen with the rise of the Internet.
Chris continues: "Of the top 50 internet stocks at the height of the DotCom bubble in 2000, 88% of those stocks didn't survive and went bust in 2017. But the winners in those top 50 ended up being Amazon, Google, eBay and Yahoo." The small allocation made to these winners made up for the losers' losses and ended up yielding around 14% per year during this period.
Cryptocurrency bundles or diversified cryptocurrency baskets that follow the entire crypto market or certain sectors of the crypto space are the easiest and smartest way to get exposure and invest in the crypto market. It's like investing in an ETF, where you get great diversification at a low cost through a single investment product.
When it comes to Crypto packages, there really isn't a more trusted name in town other than Revix. Not only will you constantly have the biggest and most reputable cryptocurrencies, but your package will automatically rebalance each month to keep you up to date with potential new winners entering the space. That way, you'll never miss out on what could be the next Amazon.
As you can clearly see above, Revix's package approach to investing in cryptocurrencies outperformed the top cryptocurrencies across all industries:
● Smart contract bundle (+121%) beat Ethereum (+88%)
● Top 10 bundle (+65%) beat Bitcoin (+9%)
● Payment package (+1%) beat Litecoin (-16%)
This should show you how diversifying your investments can have significant benefits over a longer period of time.
Where can I invest in individual crypto deals as well as diversified packages?
Revix is a Cape Town based, Sabvest backed and JSE listed crypto investment platform offering something unique to you, the investor.
You can invest in standalone cryptocurrencies such as Bitcoin, Solana, Ethereum, Uniswap, Cardano and more, or stand out from the crowd by investing in ready-made diversified crypto packages that look like ETFs.
Their Crypto Bundles allow you to effortlessly own an equally weighted basket of the world's largest and, by default, best performing cryptocurrencies without having to create and manage a cryptocurrency portfolio yourself. Revix currently offers three packages, namely the Top 10 package, the payment package, and the smart contract package.
The Top 10 package is like the JSE Top 40 or S&P 500 for cryptocurrencies and provides equal weighted exposure to the top 10 cryptocurrencies that account for over 75% of the crypto market.
The payments package provides equal weighted exposure to the top 5 payments-focused cryptocurrencies looking to make payments cheaper, faster and more global.
The smart contract suite provides equally weighted exposure to the top 5 smart contract-focused cryptocurrencies such as Ethereum, Solana, and Polkadot, which allow developers to build apps on top of their blockchains, similar to how Apple builds apps on top of its blockchain. operating system. .
About Revix
Revix brings simplicity, trust and excellent customer service to investing in cryptocurrencies. Their easy-to-use online platform allows you to securely own the world's best cryptocurrencies in just a few clicks. Revix guides new clients through the registration process to their first deposit and first investment. Once set up, most customers manage their own portfolio, but can access support from the Revix team at any time.
Remember that cryptocurrencies are high risk investments. You should not invest more than you can afford to lose and before investing consider your level of experience, your investment objectives and seek independent financial advice if necessary.
This article is intended for informational purposes only. The opinions expressed are opinions and not facts and should not be construed as investment advice or recommendations. This article is not an offer, or the solicitation of an offer, to buy or sell cryptocurrencies.
For more information, visit www.revix.com.