After decades of investing, this is the best advice you can get:
Pay yourself first. Spend less than you earn (don't go into bad debt). Invest the difference. Be patient and don't panic at market downturns!
That’s the alpha. The best answers are always the simplest. Cut the noise and focus on the big picture. But I have a few more tips to add. TLDR at the end.
Let’s assume you spend less than you earn on a monthly basis. The guide says to invest the difference. Naturally, you’ll be faced with this question next :
What is the best investment I can make with my money?
Luckily, we have an answer to that.
It’s called the Sharpe ratio.
In other words, how to maximize the amount of money you make while controlling for any associated risks with that investment.
The higher the Sharpe ratio, the better. Whatever risks you take, the return will be worth it. A Sharpe ratio of >1 is good, >2 is very good, and >3 is excellent. With that in mind, let’s look at some examples.
What is the best risk-adjusted investment in crypto?
Bitcoin
Bitcoin’s price doubled on average every year since 2011 and represents more than half of the total crypto market capitalization. It’s the most liquid coin and the one that provides the best returns bearing in mind its volatility over time. On the other hand, altcoins are a 99% bet that you will eventually lose your money.
What is the best risk-adjusted investment in the stock market?
S&P 500
This equity index returned around 10% per year since inception and is made up of 500 of the largest companies traded in the US. To be included in this index the company has to have a market capitalization of at least $15 billion otherwise they are replaced. With this index you will always own the best of the best because it is self-correcting.
When the times are good and we’re in a bull market, the Sharpe ratio for these two investments is around 2 or more which is excellent. When the times are bad and we’re in a bear market, the Sharpe ratio will fall into negative territory.
Did you spot the alpha?
In crypto, a high Sharpe ratio indicates good times to sell and secure those profits (particularly on altcoins), while a negative ratio means the market is at a discount and buying there is a good bet.
For example, you can beat 95% of traders with this Bitcoin strategy:
Buy whenever Sharpe ratio falls under -1
Sell whenever Sharpe ratio is above 2
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However, I do not recommend selling Bitcoin, nor your S&P 500 stock. Instead, aim to hoard cash and buy more whenever the market is at a discount. That’s when you strike. The reason is compounding.
Legend has it that dead people are the best investors. They don’t panic sell either!
Timing the market is hard, but what you can do consistently is buy discounts. That is how you will compound your investments even faster.
For example, if you start with 50k and add $300 more every month for 25 years, you will hit over $1 million using the S&P 500 historic return of 10% per year.
If you buy 1 Bitcoin today and add more to that bag in every bear market over 25 years, you can assume to 10x the S&P 500 returns or easily reach $10 million dollars.
This is where being patient pays off. Instead of stressing about when to sell or time the market, save money to buy discounts and continue doing that until you hit your number. Then compounding will do the rest. It usually takes about 10 years to really start seeing the compounding flywheel moving faster and faster.
There are no better investments than Bitcoin right now. S&P 500 and Gold are great at beating or keeping up with inflation, but not more than that. However, once the compounding flywheel moves on those investments, they will beat it.
As you can see in the above chart, the US stock market basically reflects the quantity of US dollars being printed. When you read news articles saying “the stock market has made an all-time high” what you are actually reading is “the dollar has made an all-time low”. You will never find articles with the latter title.
If you look closely at that chart above, you’ll notice the stock market has overshoot the US money supply. Normally, it should get back to the average which implies a crash. If we get it, be ready to buy those discounts and start working on your compounding flywheel. The earlier, the better.
While you do that, do not forget to pay yourself first. Don’t just ignore your needs for 25 years until you hit that million dollars. The point of life is to live it today, so prioritize yourself and your happiness. Don’t be like that person that has $1 million in investments and can’t spend $100 on a weekend. Invest in yourself first.
TLDR & Tips to Remember
Invest money into Bitcoin and S&P 500. You can’t go wrong with those.
Use the Sharpe ratio to maximize your return on investments.
Don’t try to time the market, it ends up badly eventually.
Your goal is not to sell, but get the compounding flywheel going fast.
Be patient. Don’t panic sell. Keep buying those discounts.
Before you invest, pay yourself first. The best investment is in yourself.
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All info is provided for educational purposes only and is not financial advice.
Very simple plan yet very powerful.
Great article and insights!