Lesson Summary 002

Before investing in cryptocurrencies, it’s important to understand your risk appetite, create a plan and appreciate the value of portfolio diversification.

The term risk appetite refers to the amount of risk you’re willing to accept in pursuit of reward. As for risk assessment, that is a process for analysing the risks of a potential or active investment.

Components of risk assessments often include asset allocation, qualitative analysis, quantitative analysis, liquidity and time horizon.

There are many risks associated with cryptocurrency investing, the main ones being:

• Cryptocurrencies run on experimental technology and their price volatility is high relative to other asset classes.
• There are custody risks associated with how and where you store your cryptocurrency.
• The relatively high level of fraudulent activity and hacking.

The importance of planning is commonly overlooked by first-time cryptocurrency investors. Failing to plan can be the main reason why you may not achieve your financial goals.

You should be constantly reviewing your investment decisions through the framework of your plan. To help ensure you remain accountable to your plan, consider implementing methods such as documenting your plan or forming an ‘accountability partnership’.

Whilst creating a realistic investment plan can improve the likelihood of reaching your financial goals, remember: a plan is only as good as your ability to stick to it.

Creating and executing an investment plan in 6 steps:

1. Assess your financial situation: Figure out how much you can afford to invest and your level of risk tolerance.
2. Set specific goals: Consider including your reasons for investing, investment goals and following the SMART principle.
3. Develop a realistic time horizon: When do you want to achieve your investment goals by?
4. Develop a strategy to meet those goals: Establish rules and processes on things such as portfolio rebalancing, profit-taking and tax.
5. Hold yourself accountable: Develop methods to hold yourself accountable to your strategy.
6. Continued research and professional guidance: Make a plan that’s situation-specific.

Asset diversification is a strategy which encourages investment across multiple industries or asset classes. Having a well-diversified portfolio is important as it can reduce portfolio risk and volatility.