All In on Crypto? Here’s Why This Best-Selling Financial Guru Says You’re Probably ‘Doomed’
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Ramit Sethi cautions against jumping on the latest investment bandwagon, whether crypto or otherwise.
Important points
- Best-selling 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 that alternative assets like crypto should not make up more than 5% of your portfolio.
Ramit Sethi, author of the best-selling book I want to teach you how to get rich have some harsh words for people who put all their money in crypto. “If you’re still going all in on crypto, I’d say you’re gambling and you’re probably doomed. It’s just a matter of time,” he recently told Insider.
Sethi advocates taking control of your finances, understanding how to earn more and spending consciously on the things that matter to you. Simply put, going all in on crypto is not in his playbook. In fact, the popular financial 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 is not against crypto investing per se. But if you’re going to buy cryptocurrency, he believes it should only make up a small fraction of your portfolio — not all of your investments. He suggests 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.”
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As many have discovered this year, cryptocurrency is a high-risk asset, and there are no guarantees as to how it will perform. As prices rose in 2020 and 2021, a crypto frenzy gripped many retail investors. People invested much more than 5% of their total portfolios, thinking it would be a quick way to build wealth. Unfortunately, the prices of even top cryptocurrencies are now down 80% or 90% of 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 had 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 on were mostly those who were involved in blockchain technology at a time when most of us had not even heard the word cryptocurrency.
What Sethi thinks you should do instead
Sethi advocates 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 effects of inflation. On average, the S&P 500 has produced gains of about 9% a year over the past 50 years. Some years it has fallen, other years it has won. But historically, people who invest in stocks with a long-term horizon have been able to generate wealth.
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Unfortunately, putting your money in an index fund and getting an average return of 9% is not as exciting as buying crypto and potentially generating a 5000% return in one year. The trouble? To take advantage of the hypothetical 5000% winnings requires an extraordinary amount of luck. You have to both identify which of the 20,000+ cryptos will be the one to pump and then manage to sell it at the top, neither of which are easy to do.
This is perhaps one of the reasons 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 to people making emotional investment decisions and buying assets without stopping to do their research. A more reliable way to build wealth is to choose safer investments and let compound interest, which essentially earns interest on your interest, work its magic. Let’s say you invest $10,000 today and let it compound at an average interest rate of 9%. In 30 years 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 and fascinating conversations, but disappears when the going gets tough. Compound interest is another kind of friend. It might not be as sexy at first glance, but it’s the kind of friend you’ll still want to know when you’re old—the one who’s consistently there and enriches your life, even if they don’t dominate a room.
Build a diversified portfolio
There are many different ways to build wealth, but the principles of diversification and long-term thinking are at the heart of many of them. Instead of going all in on crypto or another trendy asset, look at ways to balance out this risk. That means having a mix of asset types and offsetting risky assets with safer alternatives.
Going back to the friend analogy, you might want to hang out with charismatic crypto from time to time. But you’ll probably also have a group of more consistent friends as well. Not only do they have a lot to offer in themselves, but they are also the ones who will still be around if Mr. Charisma goes away.
