- I invest all the time, but I’m avoiding crypto, NFTs, and meme stocks like GameStop.
- These trendy investments feel too much like gambling to me, and I just don’t know enough about them.
- Plus, I’m happy to earn 7% annual returns by investing in the S&P 500.
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Dogecoin is up over 10,000% so far in 2021.
GameStop (GME) is up over 3,000% in the past year.
And over the past five years, bitcoin has experienced growth of about 14,000%.
There is no denying that high-risk high-reward investments, like cryptocurrency, have paid off for many investors who bet big on them.
If you invested just $1,000 into dogecoin, a cryptocurrency that started as a joke and features a popular meme as its logo, it would be worth about $100,000 just over five months later.
The same investment in the S&P 500 would have yielded about $110 in returns so far this year.
Don’t get me wrong, that return (about 11%) on the S&P 500 in just over five months is superb, but it absolutely pales in comparison to the dogecoin return.
So why am I still largely ignoring cryptocurrency, meme stocks, non-fungible tokens (NFTs), and other high-risk high-reward investments in my portfolio? I’ll walk through the three reasons below.
1. It still feels like gambling
For me, these types of investments still feel like gambling.
I know that all investing comes with some inherent risk. However, the long track record of the S&P 500 performance brings confidence that over the long run it will continue to rise in value, even if it fluctuates month to month and year to year.
When it comes to individual stocks, like GME, you could end up with +3,000% returns, or your investment could go to zero. Most likely, you’ll end up somewhere between those two numbers, but the outcome is less certain when dealing with individual stocks (which is why diversification is so important).
Even when dealing with cryptocurrency, which has become more mainstream in the past couple of years, it’s still largely a guess on which cryptocurrency will be a winner.
According to Statista, there are over 4,500 types of crypto in existence as of February 2021.
Admittedly, I am not an expert here, but I would guess that all 4,500 will not exist 20 years from now. In fact, there might not even be 100.
When you bet on crypto, you bet that digital currency is the future, but then you also have to pick the right digital currency that will exist in the future.
Frankly I think any of them could go to zero over time, which is why this largely still feels like gambling to me.
2. 7% is enough
The S&P 500 has returned at least 7% on average annually, and that is the relatively safe assumption of what it will return in the future.
For me, that return is enough to reach my financial independence goal and eventually retire.
Would a +10,000% return on my money in one year be great?
Yes, of course.
But it’s not worth the risk of a -90% decline, especially when the alternative is a high probability of getting +7% annually on average.
On top of that, I can get that return with next to no effort, thanks to index funds and robo-advisors.
3. I’m not knowledgeable enough
As mentioned above, I am not an expert on the crypto market. Far from it, actually. And this applies to NFTs, too. I know next to nothing outside of what a few articles have taught me.
This lack of knowledge is actually a reason I am steering clear of these investments.
Warren Buffett once said, “I never invest in anything I don’t understand.”
And while I generally like that quote, I don’t think it’s 100% practical for everyone. Just because someone doesn’t know how the stock market works doesn’t mean they shouldn’t learn the bare minimum and start investing in low-cost index funds.
So, I’ll adapt Warren’s quote and turn it into advice — don’t invest in anything you don’t understand and that doesn’t have a long track record of success.
If you are going to invest in a speculative investment like crypto, NFTs, or even high-risk stocks, you should do the research to make sure you know what you are getting into.
Remember, my alternative to these investments is not stuffing cash under my mattress. I am still investing with tried-and-true methods like equity index funds and ETFs to build wealth over the long run.
