They say money grows on trees. We checked, it doesn’t.
So how do you actually make money in life?
Well, there are a few options. The most common one usually goes like this: you go to school, learn a lot, get a job or start a business, get paid. You can try buying a lottery ticket, but very few people actually win something big. And let’s face it, not everyone can be LeBron (James) or Ronaldo.
We’ll start off with a few assumptions:
- First, let’s assume you can put some money aside from time to time, whether it be each week, month, or even once a year.
- Next, you may want to make a bigger purchase in the future. It may be a house, a car (more on “Lambos” later), a round-the-world trip, or simply a new laptop or smartphone. You may also want to put your kids through the best schools and give them the most valuable gift of them all - knowledge.
Which brings us to investing.
What is investing anyway?
We like to think of investing as letting your money work for you. We know, it sounds somewhat unreal. But it does happen.
Historically, you could put your money in a bank account and earn interest on it. The thing is, interest rates don’t really compete well with inflation (inflation basically means you can buy less and less with the same amount of money over time).
You could also buy bonds, essentially lending money to the government or a company, i.e. by buying government or corporate bonds.
You’ve probably heard of stocks, or shares, which represent ownership in a company. In the 20th century, stocks have been the most profitable investment you could make in the long run.
Let’s look at some figures. The average annual return on US stocks in the period 1928–2017 was 11,5%. For comparison, the average inflation rate in the same period was 2.7%.
Let’s take a break right here. Big words - average, annual, return. Scary? Wait until you hear the next one - compounding!
Yes, we’re still using English here. Let’s try to explain this weird concept. In finance, compound returns cause exponential growth.
But what does that actually mean? Here’s an example. Let’s say you had US $100 in your pocket in 1928 (and yes, we know you’d probably be more than 100 years old right now). By the way, $100 wasn’t exactly peanuts in the old days. What would happen to your $100 if you invested it in different assets (also known as “asset classes”)? This:
Wait, what? You start off with $100, and become a millionaire?!? Yup. We did the math twice. Then once again. It checks out.
Ok, back to Earth, you’re not a millionaire yet.
Because it’s hard to think in 100-year terms, a $100 investment in US stocks for a typical 10-year period would amount to $296.99. Still fascinating - you invest $100, and in ten years, you can have up to three times as much? Over the long run, yes.
Is investing really the promised land?
History has taught us that stock prices can go up or down. And when they go down, they can go waaaaay down! This is usually called a “bear market” (as opposed to a “bull market”, which corresponds to an increase in prices).
Don’t believe us? Take a look at some of the most extreme examples of the value of the mother of all stock indexes, the Dow Jones Industrial Average (or DJIA):
But there’s one thing you might have noticed. If you compare the value of the DJIA in the graphs, you can see something interesting - despite quite severe drops, the values generally keep getting higher over time:
The value of DJIA today? More than triple its value in 2009! Not too bad, is it?
How does crypto fit into the whole story?
At this point, you’re probably wondering: “Isn’t ICONOMI a crypto company? Why on Earth are they going on and on about stock prices?”
A few reasons come to mind:
- You’ve probably heard of stocks before.
- Stocks have a long history from which we can all learn something.
- Stock prices can go up, but they can also go down.
- In the long run, patience is rewarded with significant returns.
Anyway, back to crypto. As the king (or prince?) of them all, Bitcoin, has only been around for 10 years, this is all we have to draw from. So how has Bitcoin performed? In a word - fantastic!
We know what you’re thinking - didn’t Bitcoin lose most of its value in 2018? Yes, 2018 has not been kind to crypto investors, with the price of Bitcoin decreasing by a jaw-dropping 80% from its all-time high. But what if we take a look at a longer time span?
On March 31, 2011, Bitcoin was worth USD 0.78. On March 31, 2019, its value was USD 4,104.40. That’s a 526205.13% percent return in eight years. Yes, you read that right - that’s an 5,262x increase in value! That makes returns on stock investments look downright small.
To borrow from wise people of the crypto universe: “Bitcoin is the most secure transaction settlement layer in the world, so it’s got to be worth something. It’s the best performing asset class over the past ten years – it’s outperformed S&P, DOW, NASDAQ, etc. during the longest bull run. It experienced two 85 percent drops during that time, but it’s still up over 400 percent in the last two years.” (Anthony Pompliano, 2018)
Lambos don’t come overnight
Are we intentionally skipping the 2017 crypto mania? Yes. While we’re not saying we will never see the 2017 crypto mania again, to rely on it would be naïve.
The extraordinary crypto price hike of 2017 might have resulted in a “Lambo” or two (the supercar brand has become synonymous with crypto-generated wealth), but the days of making a quick buck overnight can be considered long gone. However, as we mentioned earlier, investing rewards the patient, and in the past decade, crypto has been particularly kind to its investors.
Why running an (investing) marathon is good for you
So while a sprint (in our case, investing with very short periods of time in mind) can be fun and exciting, it can also be highly unpredictable and stressful. On the other hand, time tends to smooth out the stress, making investing more like running a marathon. We know, some of us have actually done it a few times. Running a marathon is much like investing:
- do a bit of training (investigate your investment options),
- toe the start line (start investing),
- embrace the highs and get through the lows (or better yet - just ignore daily price movements),
- high five and say hi to the people cheering you on along the way (once you start investing, you become part of a community of people looking after their future),
- but most importantly - keep running!
Speaking from our own experience - crossing that finish line at the end of a marathon (which in our case would be the equivalent of achieving your investment goals) is the greatest feeling in the world!
Interested in a few tips on how to approach investing? We’ve got you covered! You can find them here.