At the start of the month Elon Musk sent ripples through the crypto realm. How he did it was just as simple as it was remarkable. In one tweet the luminary suggested that he had fallen out of love with cryptocurrency, causing Bitcoin to drop by 3.6% in value. And that’s all it took. One single tweet.
Cryptocurrency may be the latest trend to get involved in, but it sure is also the most volatile. Through the more conventional approach to investing, you have over 120 years’ worth of data to base your strategy on: inflation, recessions and booms in the stock market… everything. Cryptocurrency on the other hand is a bit different. Since it’s a new phenomenon, we have less data to play with.
If you haven’t already noticed, the value of cryptocurrency goes up and down like a yoyo, promising just as many lows as it does highs. Yes, you can make a tremendous amount of money, but you can also witness a complete wipe out of your bank balance.
There’s no need to ever place this amount of risk upon ourselves, especially when there are other proven and more reliable methods to accumulate wealth. I know of someone who invested £10,000 into Bitcoin in 2010. Now his fortune is worth £600,000.
Would you be happy with this result? Of course you would. But. surprisingly, he isn’t. In fact, he feels the opposite - he believes that he’s lost money.
His overarching goal was for this value to reach £1 million. A nice, clean figure that rolls nicely off the tongue. Not too long ago his Bitcoin fortune was sitting on £996,400, just £3,600 short of the benchmark he had in his head. But another unforeseen tremor hit the crypto world, swatting his fortune back down to £600,000.
In his mind he’d lost money, but in reality he was still £590,000 better off than when he had initially invested his money in Bitcoin. Crazy isn’t it? But this is quite common among investors. The official term is ‘anchoring’ - when there’s an irrational bias towards an arbitrary benchmark.
Because of this benchmark, investors won’t stop until they’ve reached their goal, despite the successes that come their way. This skews their ability to make prudent decisions. In crypto investor’s case, he could have sold his Bitcoin investments once he reached £996,400 and walked away a wealthy man.
But instead, he chose to take an unnecessary gamble that’s now backfired. He is still chasing that £1 million benchmark. If I was in that position, I’d take the money and leave, because I know that I’d have many sleepless nights knowing that my entire fortune could be wiped out in the blink of an eye. Will his portfolio ever recover?
But anchoring is more common than you think. I see it all the time. Some people want to retire when they’re 60 when actually it would make more sense to retire at 59. Others want to retire when they become a millionaire. Why can’t you retire when you have £950,000 in the bank?
Pursuing these arbitrary benchmarks places you at more risk than is necessary. This is exactly when you want to have a financial planner by your side. With all of my clients, I’m able to view each situation objectively and provide them with bespoke advice that best serves their interests.
This also allows them to spend less time thinking about money and to focus more of their attention on what they enjoy most in life. This is a much healthier way to live.
But here’s the crux of the story…
Knowing how and when to spend your money is just as important as working for it.
By not walking away and instead leaving his investments tied up, the Bitcoin investor is bypassing the opportunity to spend his money.
There’s no point in working tirelessly and never stopping for a moment to enjoy the fruits of your labour. It all comes down to balance and focusing on the present just as much as the future.
One way of doing this is to make small incremental payments into your pension. There are many ills of capitalism, but the reality is that the stock market is a form of national insurance where retired people can take out money while others are still paying into it.
Once you’ve retired, you’ll have all the time in the world to enjoy spending your pension on what you love most in life. And do you know what the best part is? Throughout your time making these small investments into your pension and ISA, you’ll have been accumulating wealth without having to endure the stress that the volatility of crypto imposes on its investors.
From start to finish, your financial journey will have been less stressful, more enjoyable and completely stable due to my expertise. And that’s the journey I provide for every single one of my clients.