While many would agree that the stock market has been the best tool historically to building long-term wealth, cryptocurrencies have taken that title in the past several years. Bitcoin and Ethereum, for example, have produced trailing five-year returns of 700% and 310%, respectively, compared with the S&P 500's total return of only 73% during that time.
But with cryptocurrencies getting absolutely hammered over the past few months, now is a good time to reassess your investment philosophy and the path you want to take to achieve adequate financial returns. And if you want to retire a millionaire, a valid argument can be made that avoiding crypto altogether might be the right course of action now.
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Don't chase the shiny object
With stories of individuals becoming millionaires virtually overnight by trading digital assets, a fear of missing out can no doubt be the feeling many non-crypto investors have been experiencing. It's human nature. We see others having incredible success doing something and we immediately want to copy that behavior.
The problem, however, is that it completely goes against what a rational person should do. What really matters is how much a person is consistently saving, the time until retirement, and their risk tolerance. Building a financial plan that helps one achieve personal goals is the ultimate objective.
While some cryptocurrencies have crushed stocks in recent years, they are not the right investment for everyone. For starters, digital assets are ridiculously volatile with daily moves greater than 10% a normal occurrence. And because the sector as a whole just started its teenage years -- Bitcoin was launched in January 2009 -- the potential range of outcomes for the still-nascent asset class is extremely wide. This is too much uncertainty for most to stomach.
Furthermore, the lack of regulation with cryptocurrencies, something that is not an issue in the traditional financial system, adds to the level of risk. There are countless stories of scams. And even with legitimate projects, the total risk involved with different crypto enterprises is simply unknown. We're seeing this play out right now, with major crypto hedge fund Three Arrows Capital filing for bankruptcy protection and Voyager Digital, a large crypto brokerage, suspending all trading because of market conditions.
It can certainly be tempting to buy into the hype of cryptocurrencies, especially given the monster returns some speculators have achieved by buying digital assets, but a safer approach is to just focus on owning stocks for the long haul.
Do this instead
There really is no secret to retiring a millionaire. It's actually quite simple. People should start investing at a young age and let compounding take care of the rest.
But what's the right way to invest? If you have the time to study and research different businesses, then actively picking stocks might be a viable option. Blue-chip stocks such as Apple, Berkshire Hathaway, and Coca-Cola are great companies to help build a solid foundation for well-diversified portfolios. On the other hand, if you simply want to adopt a passive approach, buying exchange-traded funds such as the Vanguard S&P 500 ETF or Vanguard High-Dividend ETF is a good idea as well.
Based on the S&P 500's average annual return of roughly 10% since 1900, someone who invests as little as $200 per month starting at age 25 would have a $1 million nest egg at 65. Of course, extending the time horizon, investing more money, and achieving higher returns will result in a greater retirement fund.
Some important things to keep in mind are that investors should expect there to be major drawdowns, such as the dramatic one we're currently experiencing. Volatility is the price of achieving stock market success. Also, be in it for the long haul, ideally targeting returns over multiple decades.
With this mindset, you're well on your way to becoming a millionaire. And the best part is that it can be done without owning any cryptocurrencies.