Setting a clear time horizon, diversifying your portfolio, dollar-cost averaging, understanding your investments, and compound interest are fundamentals every investor should keep in mind.
These are time-tested concepts that can help anyone take a step towards attaining financial freedom.
Let’s take a closer look at the 5 fundamental pillars of investing.
1. Time-horizons
A time horizon is the period during which you want to be trading or invested in an asset before you sell. Note that time horizons are used differently for traders and investors.
Generally, we hold crypto projects for a minimum of 5 years. This allows projects to create the value that the market expects from them. But regardless of the specific time horizon you choose, it’s important to stick to it and re-evaluate your investment only after the time horizon has been reached.
Time horizons help to take the influence of emotions out of your decision making.
2. Dollar-Cost Averaging (DCA)
With a defined time horizon, you can then choose whether you want to buy all of the assets you want at once, or use “dollar-cost averaging” to reach your desired position over a period of time.
Dollar-cost averaging or DCA is a fundamental investment strategy that involves purchasing in small, equal increments over a period of time. This method helps to mitigate risk and reduce the impact of volatility on your overall investment. For example, if you have $500 to invest, you may purchase $100 every month rather than $500 all at once.
The price of every investment will change over time and when you’re making large investments, those fluctuations matter. Using DCA can level out the average price. In the long-term, investing in regular intervals can reduce the impact that a poorly timed investment may have on your total.
3. Diversification
Balancing risk is important for every crypto investor and having a diverse and well-balanced portfolio helps to achieve this.
In crypto, diversification refers to the distribution of capital in different types of coins and tokens to reduce the overall risk. Diversifying in crypto involves combining a range of strategies to create a portfolio made of a wide range of assets. A diversified portfolio is more likely to offer better long-term results while reducing potential losses.
If you invest all of your capital into a single asset, you under-diversify and may experience a loss, even if the rest of the market is on the rise. Diversification is the best way to reduce risk and increase your chance of success.
In a diversified portfolio, positive performing assets tend to neutralize those with poor or negative returns.
4. Understanding what you’re investing in
Without an adequate understanding of the assets you’re investing in, it’s impossible to achieve long-term success in the crypto space. Learn the basics of fundamental and technical analysis and make sure to complete extensive research before deciding to invest in any asset.
Read more about technical analysis (TA) here.
5. Compound interest
Compound interest is when previously earned interest is added to the initial amount invested. It’s commonly referred to as “interest earned on interest.” Discover how much your money could grow with the power of compound interest with this compound interest calculator.
