Bitcoin has become a relatively popular investment opportunity for a wide range of individuals in the last couple of years. Even individuals who have little or no experience of investing in mainstream asset classes such as shares, bonds and property have dabbled in investing in the virtual currency.
While in some cases this may have paid off, the 80% decline in the value of the cryptocurrency since the end of 2017 suggests that buying it could have been a costly mistake.
With that in mind, here are three steps to investing that could lead to high returns in the long run. Following them could be a better idea than buying Bitcoin.
Understanding
Perhaps one of the biggest mistakes all investors are guilty of at times is buying something they dont fully understand. In the case of Bitcoin, this is perhaps to be expected, since its a relatively new concept. Theres blockchain technology behind it, which may take a little while for anyone to fully understand. Even with shares there are a variety of companies operating in sectors such as technology which may be difficult to fully grasp.
However, ensuring that an investment is understood in terms of what its key growth drivers could be, and the potential risks it faces, could be crucial in generating high returns in the long run. It could ensure that an investor goes into every investment with a thorough comprehension of the risk/reward ratio that is on offer.
Tax efficiency
Tax may not be the most fascinating of topics for most people. However, ensuring that an individual is maximising their tax allowances each year could make a real difference to their overall returns in the long run.
Fortunately, there are a variety of products that could help them to do so. Stocks and Shares ISAs, SIPPs and Lifetime ISAs are just a few products which could reduce an individuals tax bill. They could provide a growth catalyst over the long run and mean that the returns from the assets in which they invest dont necessarily have to be as high as if they were purchased in an account that offers little or no tax efficiency.
Diversification
Buying Bitcoin causes an investors portfolio to become increasingly concentrated in many cases, since its often not part of a wide range of assets. This means that many private investors are overexposed to the virtual currency. It could be a similar case with shares, since many private investors seem to buy a handful of stocks without considering their concentration risk.
Buying a wide range of shares can reduce overall risk. This may mean that an investors portfolio is better able to withstand challenges in specific regions or sectors in the short run, while also providing them with the opportunity to benefit from the growth potential of a variety of areas. This could enhance their portfolio performance, while providing a greater degree of stability.
Takeaway
Buying a wide range of shares that are fully understood by an investor in a tax-efficient account could be a sound means of generating wealth in the long run. In contrast, Bitcoin appears to be a high-risk option that could fall further.
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