Would you make an investment with returns of 10% return for 1 year, or 5% for 2 years?
With $1000, the two scenarios work out to…
- 10% earns $100 after year 1, or $1100 total.
- 5% earns $50 after year 1, $1102.50 after two years.
With scenario 1, you get a great return that doesn’t last as long. With scenario two, you get an OK annual return but make more money in the long run.
There’s no “right” answer as the investor needs to choose what suits her best. But this gives us space to evaluate where to park your money to earn a return on investment.
Low and Long Interest vs High and Temporary Interest
I had a recent epiphany about earning interest across different assets.
I’ve been pounding the table to get my money – and telling friends – to start stablecoin investing. It’s hard not to when platforms like Stablegains or Midas.Investments offer juicy returns like 15%+.
To me, the opportunity to get a stock-market beating investment now rather than later is a compelling option.
But…and here’s a big but… these rates are not guaranteed and can change any time.
(If I “make” 15% APY but it only lasts for 6 months, effectively I got 7.5% APY.)
How do you make the tradeoff between high interest that could change any time vs low interest that lasts?
ROI of Crypto vs Real Estate
Let’s contrast two wildly different investments: real vs digital assets.
Real estate returns
In good real estate markets, a rental property can return you ~10% every year for practically forever. There are always going to be renters, especially in desirable locations.
But uying a home requires a high down payment, a mortgage, and risks of operating a property. Plus, it’s a relatively illiquid asset: it may take some time to sell your home if you really need to.
Good news: you don’t have to buy a home to invest in real estate. You could buy shares of partial ownership via Fundrise or buy REITs on Robinhood.
Crypto interest returns
Compared to real estate, crypto represents digital assets in alternate financial networks. Not only can you earn interest on your crypto, but you can also earn real dollars using stablecoins. Crypto networks tend to be permissionless and trustless, meaning that you can put in – and take out money with less hoops to jump through than in traditional finance.
The downsides? As an emerging asset class, crypto carries more risk and volatility. Crypto returns aren’t as durable and proven yet.
If you have a chance to earn 15% APY in crypto now, there’s no guarantee that the 15% will last 5 years, let alone 1.
What next + my personal take
Building wealth requires you to compound money over a long period of time. When you’re an active capital allocator, you might snag 20% in one year, the investment closes, then you’re left to decide what to do with the rest of that money. Maybe you don’t find any investment and your money “earns” 0% the next year. Or maybe you deploy it to something safer, then that makes 5% a year.
Or you can take the more passive route and rely on stock indexes and real estate to return an average of 10% a year.
But nothing is guaranteed. There could be a shake up in the market and someone’s “consistent” return can drop, e.g. a recession happens. If you own stocks, the price fluctuates frequently. If you own a house and need to do major repairs or construction, then those expenses cut into your profits.
So…would you take a 5% return for 20 years (100%+) versus 20% for 1 year?
It helps to think of your investment money in different buckets, with different purposes:
| Type of money | Example |
|---|---|
| Long money Money you’re willing to lock away in an investment for a long time | Stock market index, bonds, retirement accounts, real estate. You’re want to be less sensitive to price movement and hold for long-term historical performance. |
| Defensive money Liquid money you want to keep on hand and ready to access | Checking and savings accounts, stablecoin interest accounts. You don’t want prices to fluctuate and rather earn a “straight” return on investment. |
| Opportunistic money Available funds that help you take advantage of certain investments | Buy the dip when an investment is on sale, single stock buys, trying out a new investment. |
There’s no wrong place to park your money. There’s just more or less optimal ways to do it, according to your goals.
The biggest losers: if you have more cash than you need sitting on the sidelines earning nearly 0% interest…strongly consider investing a portion of your money.
You can read my beginner’s guide to investing to get started.
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In my 2021 financial review I noted how much of my portfolio is in crypto, and that I want to start diversifying out to less risky assets like real estate.
As someone who loves earning high yield, my personal takeaway is a deeper appreciation for durable investments that might not give the highest returns, but can keep up those returns over a long period of time.