Ramit Sethi warns against jumping on the latest investment bandwagon, whether that’s crypto or something else.
- Bestselling author Ramit Sethi says going all in on crypto is a bad idea.
- Sethi advocates buying safer investments and letting compound interest work over time.
- Sethi suggests alternative assets like crypto should not make up more than 5% of your portfolio.
Ramit Sethi, author of the bestselling book I Will Teach You to Be Rich has some harsh words for people who put all their money in crypto. “If you’re still going all in on crypto, I’d say that you’re a gambling addict and you’re probably doomed. It’s just a matter of time,” he recently told Insider.
Sethi champions taking control of your finances, understanding how to earn more, and spending intentionally on the things that matter to you. Put simply, going all in on crypto is not in his playbook. Indeed, the popular finance guru lists it as one of the three most common wealth-building mistakes young people can make. Here’s why.
Why Sethi thinks going all in on crypto is a bad idea
To be clear, Sethi isn’t against crypto investing per se. But if you are going to buy cryptocurrency, he believes it should account for only a small fraction of your portfolio — not all of your investments. He suggests that alternative assets could make up 1% to 5% of a diversified portfolio, but points out, “You rarely see that kind of discipline when it comes to crypto.”
As many people discovered this year, cryptocurrency is a high-risk asset and there are no guarantees about how it will perform. When prices were going up in 2020 and 2021, a crypto frenzy took hold of many retail investors. People invested a lot more than 5% of their total portfolios, thinking it would be a quick way to build wealth. Unfortunately, the prices of even top cryptos are now down 80% or 90% on their all-time highs and many investors have seen the value of their investments decimated.
Unless you win the lottery or inherit a large sum of money, building wealth is rarely a quick process. Sure, if you’d bought Bitcoin (BTC) in the early days, you could be sitting on a pretty hefty portfolio today. But you can’t make investment decisions based on what might have happened. The people who bought crypto early were mostly those who were involved in blockchain technology at a time when most of us hadn’t even heard the word cryptocurrency.
What Sethi thinks you should do instead
Sethi advocates for buying safer investments such as index funds or I bonds and holding them for the long term. Index funds track a specific market such as the S&P 500. I bonds are a type of bond designed to avoid the impact of inflation. On average, the S&P 500 has produced gains of around 9% a year for the past 50 years. Some years it has fallen, other years it has gained. But historically, people who invest in equities with a long-term horizon have been able to generate wealth.
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Unfortunately, putting your money into an index fund and getting an average return of 9% isn’t as exciting as buying crypto and potentially generating 5,000% returns in one year. The trouble? To benefit from those hypothetical 5,000% gains takes an extraordinary amount of luck. You’d have to both identify which of the 20,000-plus cryptos would be the one to pump and then manage to sell it at its peak, neither of which are easy to do.
This is perhaps one of the reasons why Sethi says investing should be boring. Jumping on the latest trends and watching the value of your portfolio skyrocket can be addictive. But it can also lead people to make emotional investment decisions and buy assets without stopping to do the research. A more reliable way to build wealth is to opt for safer investments and allow compound interest, which is essentially earning interest on your interest, to work its magic. Let’s say you invest $10,000 today and let it compound at an average rate of 9%. In 30 years time, it could be worth over $130,000 — without you having to lift a finger.
Think of it this way. Crypto is like a charismatic new friend who promises all kinds of fun nights out and fascinating conversations, but disappears when the going gets tough. Compound interest is a different kind of friend. It may not be as sexy at first glance, but it’s the type of friend you still want to know when you grow old — the one who’s consistently present and enriching your life, even if they don’t dominate a room.
Building a diversified portfolio
There are lots of different ways to build wealth, but the principles of diversification and thinking long term are at the heart of many of them. Rather than going all in on crypto or another trendy asset, look at ways to balance out that risk. That means having a mix of asset types and offsetting risky assets with safer options.
To go back to the friend analogy, you might want to hang out with charismatic crypto from time to time. But you probably also want to have a group of more consistent friends too. Not only do they have a lot to offer in their own right, but they are also the ones who will still be around if Mr. Charisma disappears.