It is invested for additional income. As simple as that. For ordinary mortals, investing is a purely financial matter. In other words, we have capital and we want to put it to “produce”. The old art of making money with money. In this way, we grow financially.
Of course, some people invest with a double or triple purpose. The financial goal is not entirely lost. But it continues to be pursued in the company of other objectives. Some want to “save the planet” with their investments by supporting certain companies. Some want to encourage diversity in the corporate world. Others promote the libertarian utopia by joining citizen and alternative monetary systems separate from state rule. In pursuing these political and social causes, in many cases, investors compromise financial goals for their ideals. They want to influence with their money.
This article is not intended for the idiosyncratic investor. Then, We are excluding, with all the intention in the world, all the libertarian, anarcho-capitalist and conservative paraphernalia so present in the crypto community. This is an article for pragmatic investors, opportunists and speculators. As simple as that. Here we go Adam Smith. Own interest. Profit. What you want is to put bread on the table. No apologies, no complexes. invest money for money. It is sin?
Now, we already have the objective: Make money. We have capital and we want it to grow (percentage). We want it to grow quickly, but safely. That implies that the first duty is to weigh the risks and opportunities. Broadly speaking, risk is linked to aggressive growth. And security is linked to stability and modest growth. He who does not invest, neither loses nor wins. You risk nothing. You have nothing to lose. For example, those who do not buy BTC are not exposed to the financial risks that its high volatility implies.
Of course, in today’s world language is constantly abused. So, for propagandist reasons, they play on words in rather irresponsible ways with phrases like “the only risk is not investing in BTC”. So, if we are “poetic” with the term, managing “risk” becomes difficult. Here we are talking specifically about financial risk. In other words, the possibility of losing our money. We stick to the technical meaning and completely ignore the propagandist manipulation.
The first thing is to make an assessment in the context of a forecast. hoh, look to the future using past patterns as a reference and building rational expectations. We will start with fixed income instruments. In this case, the risk is low. But the profits are not from the other world. In other words, the money is safe, but the growth is modest. We are talking about a growth of 2%, 3% or 6%. It all depends, of course, on the instrument. I mean Treasury bonds (USA), corporate bonds, savings account, bank certificates, etc.
Fixed income instruments provide stability to a portfolio. They are extremely important in that sense. We cannot underestimate the importance of this stability. Certainly the goal is to grow as aggressively as possible. Nevertheless, having a fixed and secure income is vital for many. A retired person, for example, requires this income stability. For a young person with a good job, stability is not that important, because their priority is to grow. We are talking, then, about different attitudes to risk due to different circumstances.
Now variable income instruments. The quintessential benchmark is the S&P 500. Historically, the S&P 500 has recorded average growth of approximately 10%. Of course there are bad years with losses of 30%-50%. Note: Bitcoin offers more opportunities and more risks than the S&P 500.
Now, a “risky” investment that offers 6% per year is not the best option. Why? Well, because there are safer alternatives that offer the same thing. And if the investment promises losses of 70%? Well, in that case, it is better not to invest. It is better to win 0% than to lose 70%. That happens in the case of a bearish forecast. The investor would rather sell and accumulate cash than lose money.
ANDSo, we have capital and we want to invest to grow financially (safely and constantly). We make an assessment and forecast. Then we take a position. What is the risk? What is the profit?
Basic principle: To avoid ruin, the risk/reward ratio must follow a minimum ratio of at least 1:2. And, in addition, the risk must be able to be covered by other income.
In other words, before entering the arenawe must calculate our (potential) profits and losses. If we’re risking $1 to win $2, we’re not that bad off. Otherwise, we are not having the best risk management.
Suppose we buy $65K anticipating a 50% increase in a few months. But our forecast failed. Why do we limit the risk? Before buying, we must establish our retirement plan. The take profit” and the “stop loss”. These considerations apply to all time frames. If we buy at $65K and our take profit is $100K, our “stop loss” could sit at $48K to maintain the 1:2 ratio. But we must take into account that we must count that our other investments must be able to cover that loss.
In the case of earning assets, dividends and the underlying assets play a very important role in calculating earnings.. So we can afford to see beyond the market price. In the case of non-performing/speculative assets (such as Bitcoin), it all depends on price fluctuations. Profits or losses revolve solely around price volatility.
Two things. The first. Losing an opportunity is not the same as losing money. That is to say, The money that we do not earn by losing an opportunity cannot be measured with the same yardstick as the losses of money in the investments that we have made. If we don’t buy and the price goes up, we have missed an opportunity. But, in reality, we have not lost anything. On the other hand, if we buy and the price falls, then we have lost money. The first scenario is less painful than the last.
The second. Unrealized losses are also losses. They have to be taken very seriously. It is a mistake to take them lightly. Another basic principle: Prolong your gains and cut your losses. Or, put another way, the price is in free fall. And it is not sold waiting for recovery. Risk is not managed. So, we leave everything to the good of God. Error. We cannot leave our unrealized losses unmanaged. I insist. It is always better to win $0 than to lose 70%. And the background? And the recovery? Well, it is better for the fund and recovery to take us with cash than nothing.
And the profits? Suppose we buy and suddenly the price skyrockets. We passed our point of take profit”. What do we do? We sell? No, not necessarily. We changed the orderstop loss” to the point of “take profit” to guarantee the gains, but we let the gains drag on. Our numbers must be very clear.
Well, here are words for reflection.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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