This Is The Best Way To Invest In Volatile Assets

Investing is for all but investing in a volatile asset is not for all.

Markets don’t go up perpetually. If it does, everyone will be an investing genius right now.

In a market where a 100% gain is possible within a year, don’t be surprised to see a 50-70% decline as well. That’s the way it works. That’s the meaning of volatility, the price for high returns.

There is self-reinforcing psychology in the market of volatile assets. The more assured the public is that the market will keep going up, the higher the probability that a crash is imminent.

The general public here is often new adopters who came into the market of a volatile asset mainly for the gains. They are also quick to suffer most losses. They came for the euphoria, not the underline value. So when crashes happen, they have no idea what’s going on or how to deal with and run away from the market.

Again, these are self-inflicted and it’s the same story across centuries. I noted in another article that those who make the most gains, in the end, tend to be those who build on the value and not those who came for the euphoria.

Markets across the globe are down. From stock to commodities and from cryptocurrency to fiat currencies. It’s a global tsunami.

However, crypto has gotten hit the hardest. A lot of assets in that world are down up to 90% as of now and it’s like they are not done yet.

Crypto is a case in point for me at the moment because it’s the grandpa of the ongoing tsunami.

You know you have gotten to the height of a bubble when almost everything you buy goes up. Then the slogan “just buying anything, they will go up” prevails. Another sign of the height is when both the uninitiated and initiated throw asset names around here and there of what you should buy and what you shouldn’t. Twitter is taking a rest from this behaviour as of now.

The truth is that this is no new knowledge. Those who were around in 2017 warned us, same for those who were around in the 2008 financial crisis and the internet bubble of 1999.

But you see, human behaviour will not let us learn and cycles are self-reinforcing.

This is my first time experiencing this kind of event as well and I like it. Not because I am not affected but because I’m learning it early in my journey.

Yet I must say that there is a strategy to invest in volatile assets in a way that you are not materially impacted when dips as deep as this happens. And still benefit significantly when the massive gains come along.

That strategy is the reason I can write this article and I’m not calling you all to solicit financial help. Lol.

Before I talk about the strategy, let me say that it pains me that the retail investor more than those already rich are those who suffer the most from dips in a volatile asset. It’s not easy to desire and optimize for alpha. 

Alright, the strategy is about “Efficient Capital Allocation” (ECA).

There are two underlying principles to this strategy. And you can employ it for investing generally, not just for investing in volatile assets.

1. The higher the potential return, the lower the percentage of your capital you should invest in it. Don’t worry, I’ll explain.
2. Patient (long-term) capital alone can be invested in a volatile asset. Short-term capital should be allocated to fixed income or other less volatile assets.

I’ve unpacked the second point in a Twitter thread earlier. See below.

So let’s talk about the first; High return, lesser allocation.

The logic here is simple. Assets with potentially high returns are somewhat high risk as well. Meaning you can lose a lot of your money just as you can make a lot of it.

In such a case, covering your downside is more important than optimizing for the highest gain possible. Ensuring you don’t have more than 10% of your ‘life savings’ is important. 10% is like the maximum.

Let’s assume your life savings is N1m. N100k will be the maximum allowable to be invested in Crypto.

If that 100k goes to zero, the real loss you suffered on your net worth is just 10%. And that’s even assuming that your 900k that’s left didn’t make any money at all. In the case that it made some gains, you might even offset your loss. Also, you would have learned an invaluable lesson if you lose all the amount that you invested in the volatile asset.

However, if you happen to make your expected 100% gain from the volatile asset, your whole portfolio would have increased 10%. This kind of allocation will allow you to have great sleep at night.

Now, that’s a good simplification but there are nuances. I won’t deal with that now. One of them is how easy is it for you to make the N1 Million again if you lose it all? If it is very easy, you have more room for risks and if it’s hard, you may even not have room for up to a 10% allocation in a risky asset. These nuances have a way of informing your allocation. Well, you must have gotten the main lesson here.

Okay, I started this by saying investing is for all, but investing in a volatile asset is not for all.

To make wealth, you must invest. You must make your money work for you and earn while you sleep. No one should ever doubt that.

But investing in a volatile asset requires more effort than the majority of us can give it. And that’s why there is trepidation in the heart of a lot right now. You have bitten more than you can chew.

There’s comfort though. A lot of us still have our best years ahead of us. The whole that we lost in the crypto dip, we will probably recover once the market gets back on an uptrend or in the future it will be money that we can make within a few hours. So despair not. Be glad you are learning this early.

Most importantly, always seek education/knowledge about the assets you are investing in. Also, read my blog, I have a lot here for you.