Hey everyone,
Hope you’re well!
Took a little break from writing to focus on starting a new role in my career.
I wanna start by addressing the LUNA/UST catastrophe in crypto over the past week.
If like me, you had a stake in the Terra ecosystem via LUNA/UST too, I’m sure this week has been a wild ride. But, if you’re still breathing, you can build back again, really, don’t lose heart.
This week has been a week of reflection for me. I lost a portion of my investment portfolio on the Anchor Protocol, but it’s time to take stock and build back again.
3 things that come to mind were:
Risk Management & Portfolio Sizing
Prioritize Cash Flows
Time Horizon
Risk Management & Portfolio Sizing
I’d describe crypto as an asset that’s furthest out on the investment risk curve. Which is why it’s volatile both ways - in price appreciation and depreciation.
The best way to survive is to have the following mindset so aptly tweeted by @punk6529: (click on the picture to read his thoughts on surviving crypto)
Mentally write off the amount that you choose to invest in crypto. That’s how you survive psychologically in crypto.
This doesn’t mean crypto is bad investment asset per se, it’s just that being in crypto right now, you’re still early in its adoption curve, similar to where the internet adoption was leading up to the dot-com bubble crash.
Now, in order to be able to mentally write off the investment amount, unless you have an excellent contingency plan, it is obvious that we shouldn’t invest our entire life savings into crypto or any other single asset. We manage risk by managing our exposure to the asset.
Only invest the amount you’re ok with losing and won’t wipe you out financially.
Prioritize Cash Flows
Cash flows help give us a peace of mind through the good and bad times in the markets. In the good times, we’re able to build a rainy-day fund, in bad times, we’re sustained knowing we won’t go bust.
Moreover, wealth transfers happen in bad times. Having cash flows helps us take advantage of the opportunities/bargains at hand when the market is irrational and fearful.
The focus for me moving forward is also to prioritize building streams of cash flows.
Likely this will be in the form of a business/real estate of some sort rather than just purely focusing on stocks/crypto investing to build wealth.
Time Horizon
Often when we stretch out the time horizon in investing, things look much better.
Market crashes become a blip on the chart, see the SPY and Bitcoin below:
The dot-com bubble crash pales in comparison to how much the SPY has appreciated over the years since. For Bitcoin, the 2013 crash doesn’t even appear on the chart.
Investing in good assets with at least a 5-10 year time horizon helps keep us steady in turbulent times.
Often our greed for getting wealthy as fast as possible leads us to make irrational decisions. But giving ourselves a longer runway keeps us level-headed and the journey to our financial goals builds character as well - character to handle the wealth that we build.
Ok, so 3 key points:
Risk Management by portfolio sizing - manage your exposure → how much is up to individuals as we all have different financial goals
Focus on building cash flows as well - cash is king in hard times
Time Horizon - expanding our time horizon to build wealth keeps us level-headed when making investment decisions especially during hard times.
Take care,
Justin