How I Invest (Stocks, Crypto, P2P)

How I Invest (Stocks, Crypto, P2P)

Many of the investing posts on this blog, although subjective, are not personal. In other words, I often provide the facts and talk from experience, but rarely express my thoughts, feelings, or dilemmas.

The reason for that is not withholding information, but actually maximizing the actionable value for my readers. It’s part of the code of MonkWealth itself – straight from the About Page:

I want this to be for my readers as much as it is for me.

This time I will include some of my approaches, expectations, and even forecasts when it comes to my investments. I want to highlight the fact that these are my opinions, not financial advice, and they might not produce an optimal investment strategy for everyone.

In case you want to learn how to invest or still don’t have a tight grasp on investing concepts & terminology, I’d send you to the Glossary and the Become an Investor Project – the most structured introduction to building long-term wealth with the stock market.

Now, let’s dive deeper into how I currently play this game.

Stocks

The stock market is where the largest part of my portfolio is allocated.

Its long-term potential of building and maintaining wealth aside, I have a keen interest in financial markets and financial analysis. I can’t really think of a company without viewing it in the greater context of the current macroeconomic conditions and having the urge to see the financial statements, performance, or relevant ratios and their position compared to the industry’s or market’s standard, etc.

As much as I enjoy fundamental analysis, my approach to stock picking is: I don’t do it. I let the market indices do it for me and I pick the most profitable ETFs to track the ones I’m interested in.

As for the reasons I’m not picking stocks, they’re mostly empirical. You most probably already heard them:

• There are no active funds that outperformed the market on the long run;
• Most of the active traders lose money;
• The best performing accounts are those of dead people, etc.

Now, I’m not saying that no one could ever consistently outperform a certain benchmark, but luck won’t be the primary factor supporting it. That would require a serious time, money, and effort invested and a simple emotion or accidental wrong move can make it all collapse.

So, my long-term investment strategy when it comes to the stock market is: don’t beat it, match it. Cost average using a diversified index as a benchmark and let your position grow with the market itself. And when things get tough, remain calm by remembering the anthem: “the market always goes up”.

Anyway, knowing what I know it’s hard to ignore certain indicators that show where we’re headed. And I’m not talking about trade wars or volatility but, for example, the yield curve inversion – preceding each of the last recessions, the recent interest rate hike, or simply the moment in time we’re currently at – the longest bull run ever.

Of course, one might argue that we’re always headed for a recession – we just don’t know the time it will hit.

I agree with that.

That’s why I’m not betraying the proven long-term strategy of matching the market, but while at ATH, I’m not investing 100% of the surplus. My DCA contributions are with ~50% of the amount I save, while I use part of the other half for alternative investments, but mostly in cash. I make sure to keep a high enough cash allocation for contributions once the valuations are better, i.e. after the next recession reaches support levels. The opportunity cost and the purchase power I’ll lose due to inflation will be compensated by the market returns from the recovery and the bull market ahead.

Lastly, there is a US election cycle ending next year. I don’t want to do forecasts on my blog, but I’ll just say that the US president can’t afford a recession until then, and it’s not unrealistic to expect a surge preceding it.

To wrap this up, the most important thing is that I’m comfortable with my approach. My risk-tolerance, investment horizon, and goals are so aligned with my investment strategy that I sleep well at night even when things go bad (like in December). I believe in index investing as a long-term vehicle for accumulating and maintaining wealth and even though I could have made an extra percentage here and there by picking winners, my degree of certainty wouldn’t let me do it with high enough allocation so that the actual returns are significant.

In other words, if I’m risking my money, I’d go into asset classes where the risk-reward spread extends even more…

Cryptocurrency

This is a completely different animal.

There is a lot to be said about how risky of an asset class this is, but as long as we’re smart about it and invest only what we can afford to lose (for example: 1-10% of the full portfolio), we can make a serious ROI, while limiting the loss to 100%. I’m not sugarcoating it – having a potential and not unrealistic 10x return on a position you’re comfortable losing is a good bet.

The interesting thing about this market is that certain patterns are pretty obvious, especially when put in the greater picture of bull/bear markets. Even in the short-term, the polarity principle is easy to detect in most charts – breached resistance levels become support levels and vice versa.

Now, I’m not a genius trader, just an intelligent investor. That’s why nowadays I’m less focused on the day to day price movements and more focused on the above-mentioned “greater picture“. Namely:

• The Bitcoin halving, coming in exactly one year (23 May 2020). There are no guarantees, but similar to the yield curve being an indicator for an upcoming recession, the halving of the block reward historically was in the early-mid stages of the major rallies. Scarcity increases demand.
• Human emotions, such as FOMO and FUD, acting as amplifiers to the other factors – making a simple bull market turn into a rally, a bubble, and a crash. Taking a contrarian approach is almost a surefire bet with certain enter indicators such as Google search trends popularity and increase in trading volume, especially during a breakthrough (breached resistance level – the early stages or a bull run).
• The natural market cycles. It’s a small sample, but an 80% crash followed by a bear market and a parabolic rise doesn’t sound unfamiliar.

Many people claim that there is an inverse correlation between the stock and crypto markets’ performances, but since I only saw it in cherry-picked examples, I’m not hoping on crypto being the hedge against a recession. Coincidentally though, the halving happens in mid 2020 and the US presidential election is in late 2020, so it might turn out that the two (rally & recession) happen in the second half of 2020.

My degree of hope is stronger than my degree of certainty. But still I’m confident and comfortable enough with my allocation and strategy. Taking a contrarian approach, relying on patience, and hodling while nobody believes. As you can see in my financial updates, I maintained my position at ~5% after the November 2018 pullback and bear market. I also increased my position, mainly in BTC and XRP after the first indicators and made >50% in returns. But seeing the potential this rally has, even with a stagnant month or two, I’m not entertaining selling until the price approaches $15k. And then I’m reentering in a pullback to the next ATH, but that’s post-2020 talk.

I’m aware that past performance doesn’t guarantee future results, but I’m willing to take the risk with an amount that wouldn’t change my life one bit even if it disappears tomorrow. No better quote to close this section with:

The history doesn’t repeat itself, but it does rhyme.

Peer to peer (P2P) Lending

This is the most recent investment opportunity I undertook and my experience so far has been perfect. Not in the sense that I’m amazed of how good of an opportunity it is, but that I’m making a monthly return perfectly aligned with the loans’ marketed interest rates, not more and not less. Basically, the returns are just as expected.

All the platforms I use have an Auto-Invest option, where I can specify my required rate of return, types of loans, geographic coverage, minimum/maximum investment amounts, rating of the loan originators, etc. That makes P2P a great set-and-forget type of investment, unless you want to pick where you lend your money or you’re interested in what your money is funding.

Most importantly, there is the option of a Buyback Guarantee, which means that if a repayment of a loan is delayed by a certain period, usually 2 months, then the loan originator is obligated to buy back the loan from the investors. This means that even if a lender defaults on the loan, you, as an investor, will get your money back. Sounds risk-free, right? And under certain assumptions, it is.

Even if we analyze it statistically, due to the minimal standard deviation of returns, this is an asset class that has the lowest coefficient of variation and highest Sharpe ratio, making it the best investment opportunity of all.

However, I still consider it a risky investment and, similar to crypto, I only invest amounts that I’d have no problem losing.

So, where’s the risk, you might ask.

I’m not talking about lenders defaulting on loans, cash drags, or liquidity risks. I’m shielded from all of those by buyback guarantees, diversification (inter & intra platform), and an emergency fund. However, all being relatively new, we still haven’t seen how the P2P platforms behave in downturn economy. The best I can do is pick those whose returns and promises don’t exceed the market standard and keep a low enough allocation until they’re regulated.

Long story short: I plan to keep my allocation at ~5% in P2P loans for the foreseeable future.

Check the Things I Use page to see which platforms I use for all three types of investments.

Afterword

And of course, I may be completely wrong. Actually, I’m certain that I’m missing something – there isn’t a perfect asset allocation or investment strategy. But most importantly, I’m comfortable with my approach. I’m sleeping well at night even when my portfolio dips because I know I have a couple of enoughs up my sleeve to smooth out everything:

• Enough diversification across the stock market to handle bankruptcies
• Enough diversification across asset classes to handle a specific market collapse
• Enough diversification across platforms to handle middleman issues
• Enough job stability to support myself if all investments go south
• Enough cash to handle even bigger crisis
• Enough skills and knowledge to bounce back, financially or emotionally
• Enough time to take care of everything
• Enough indifference to accept and adapt to whatever happens

Actually, the biggest investment is into the life I want to build for myself and my family.

And that has very little to do with money… As long as the world continues to exist as we know it and the net-worth is at least a mid 6 digit number.

Otherwise, we’ll improvise, adapt, and overcome.