Crypto markets continue upward march as ETF chatter grows louder

Hola folks!

It's the season, and I hope you all had a gala time celebrating Christmas, devouring some delicious cakes and puddings, and opening many gifts. The festive season will prevail till the 1st of January, and with the festive mood, there will also be a wave of New Year resolutions and promises. 

We are here to help you make sound financial New Year resolutions while you enjoy the festivals. Let's dive deep into this week’s newsletter to read about the power of compounding in Mutual Funds, the importance of investment portfolio diversification and the optimal diversification strategy, news on what shook the crypto market last, and end 2023’s last newsletter with a fun crypto puzzle.

Compound interest, popularly known as compounding in investment jargon, is your best friend when it comes to investment. Watch the video below to learn more about the power of compounding in mutual funds. The video delves deeper into nuances of compounding, discusses compounding mutual fund schemes, explores compounding interest, and provides insights on calculating compounding interest. 

Compounding is the 8th wonder of the world, and it impacts all investments. We will talk about the optimal diversification and investment strategy for your portfolio. Read on to know more.

Portfolio Building in your 20s and 30s - Part 5

An investment portfolio is a collection of assets, including stocks, bonds, mutual funds, and exchange-traded funds. Building an investment portfolio might seem intimidating, but there are steps you can take to make the process streamlined and painless. 

For example, you have an EPF (Employee Provident Fund) account in which a fixed portion of your salary is deposited monthly; plus, you also invest in Mutual funds and buy stocks occasionally. When evaluating your investment portfolio, you should consider all these investments collectively, not independently. 

Here are the important factors one should consider before building a portfolio or evaluating one's existing portfolio.

• Decide how much help you want

Investment requires knowledge about various investment alternatives and strategies, as well as some understanding of the economy, geopolitics, etc. This can get demanding. You can get professional help or ask a friend or a family member who has an interest in investment and thus knows about it. Or you can opt for the DIY route and study about investment, read books and watch videos of investment strategies, and then implement your knowledge in building your investment portfolio. 

You will have to decide the extent of help you need and act accordingly. 

• Choose your investments based on your risk tolerance

Once you start building your portfolio, you will have to choose investment alternatives based on your risk tolerance. Here, we list some popular investment alternatives readily available to investors today.  

Stocks

Stocks are a tiny slice of ownership in a company. Investors buy stocks that they believe will go up in value over time. The risk is that the stock might not go up or lose value. To help mitigate that risk, many investors invest in stocks through funds — such as index funds, mutual funds, or ETFs — that hold a collection of stocks from a wide variety of companies. In case you opt for individual stocks it is advisable to allocate a small fraction of your portfolio to stocks as they entail more risk. 

Bonds

Bonds are loans to companies or governments that get paid back over time with interest. Bonds are considered to be safer investments than stocks, but they generally have lower returns. Since you know how much you’ll receive in interest when you invest in bonds, they’re referred to as fixed-income investments. This fixed rate of return for bonds can balance out the riskier investments, such as stocks, within an investor’s portfolio. 

Mutual funds

There are a few different kinds of mutual funds you can invest in. Still, their advantage over buying individual stocks is that they allow you to add instant diversification to your portfolio. Mutual funds allow you to invest in a basket of securities, made up of investments such as stocks or bonds, all at once. Mutual funds have some risk but are generally less risky than individual stocks. 

Determine the best asset allocation for you

So you know you want to invest mainly in funds, some bonds, and a few individual stocks, but how do you decide exactly how much of each asset class you need? Splitting up your portfolio among different types of assets is called your asset allocation, and it’s highly dependent on your risk tolerance.

The financial experts suggested rule of thumb for portfolio allocation in stocks and bonds is subtracting your age from 100 or 110 to determine what portion of your portfolio should be dedicated to stock investments. For example, if you’re 30, the rule suggests 70% to 80% of your portfolio allocated to stocks, leaving 20% to 30% of your portfolio for bond investments. In your 60s, that mix shifts to 50% to 60% allocated to stocks and 40% to 50% allocated to bonds.

While these are expert-cited rules, they may change for your case depending on your risk profile, your need for liquidity, the amount of debt you have, etc. 

• Rebalance your investment portfolio as needed

Over time, your chosen asset allocation may get out of whack. If one of your stocks rises in value, it may disrupt the proportions of your portfolio. Rebalancing is how you restore your investment portfolio to its original makeup.

Some investments can even rebalance themselves, such as target-date funds, a type of mutual fund that automatically rebalances over time.

Portfolio re-evaluation and rebalancing are recommended by financial advisors at regular intervals such as six or 12 months. But this frequency can change depending on market volatility. For example, if you had an investment portfolio with 60% stocks that increased to 65%, you may want to sell some of your stocks or invest in other asset classes until your stock allocation is back at 60%.

The above-stated rules aren’t set in stone. You should carefully consider your risk tolerance when allocating your assets. 

Pro Tip: If you are trying to invest for the first time, it is advisable to create a mock portfolio before you start investing with your money. 

Crypto markets witnessed another strong week of gains, led by Bitcoin and specific Layer 1 competitors of Ethereum. At the same time, token-specific price action becomes increasingly important to monitor. Overall, the crypto market cap surged past $1.7 trillion even as Senator Warren in the US continues to push her "anti-crypto" stance. 

Meanwhile, the Spot Bitcoin ETF applicants met with the SEC behind closed doors, fuelling speculations of an inevitable approval. Further, top applicants like Bitwise have also rolled out their marketing/advertising campaigns to garner more interest in their ETF product among institutional investors.

On the regulatory front, the news coming out from beyond the US continues to be more encouraging, particularly in Europe. France announced the rollout of conditional licenses to crypto giants Coinbase and Circle, paving the wave for them to operate in France. The UK government, too, came out to state that their upcoming crypto regulations are getting favorable feedback from industry participants and will aim to make the UK a crypto hub in 2024. Even in the US, lobbying efforts have started gathering pace for the 2024 elections as "crypto-friendly" PAC has already raised $80mm in funding.

It was mostly rangebound trading for the broader crypto markets, but certain token-specific developments resulted in major outsized positive returns! 

Solana's SOL surged past Ripple XRP in the Large Cap space and overtook BNB to become the 4th largest crypto asset by market capitalization, as the token's price crossed $110. The continued meme coin frenzy has moved to WIF, and Solana ecosystem DEX volumes have shot up massively. 

The pack of ETH Competitors also continues to see a solid inflow of investor interest, sending higher prices for layer-1 alternatives like AVAX, NEAR, and ICP. Avalanche's AVAX has started gaining meme coin traction, while possible ecosystem token airdrops are also increasing interest. 

With Celestia's TIA gaining much traction, the NEAR ecosystem's data availability capabilities are getting much attention, sending NEAR token prices surging. ICP's price increase can be attributed to its recent announcement of getting Bitcoin exposure on its chain. 

Certain recently surged tokens also came under selling pressure last week due to profit booking. These included Celestia's TIA, Ordinal's ORDI, and Solana ecosystem's meme coin BONK. 

• SOL $109.41 ⏫ 46.52%

• AVAX $43.15 ⏫ 7.68%

• NEAR $4.10 ⏫ 59.35%

• TIA $12.22 ⏫ 1.00%

(All data here is as of 9.45 am., 27 December 2023)

Before we conclude, here’s a quick look at some important news from around the crypto world.

• Ethereum developers are ramping up their testing process for the upcoming Dencun upgrade, which would add capacity for data storage via a new process known as “proto-danksharding.” Developers said they are targeting January 17 for the Goerli test network (testnet) to run through Dencun, the much-anticipated upgrade that will enable “proto-danksharding,” which reduces fees for layer-2 rollups and scale the blockchain by increasing space for “blobs” of data. Read more here. 

• Hong Kong regulators are ready to consider applications for spot crypto exchange-traded funds (ETFs). In a joint statement, the Securities and Futures Commission and Hong Kong Monetary Authority said the virtual asset environment had changed since 2018 when the SFC formulated a “professional-investors only” regulatory approach. Read more here. 

Flirting With Stocks: Stock Market Investing for Beginners

By: Anil Lamba 

Anil Lamba’s Flirting with Stocks is a must because it simplifies stock market investments for Indian investors. The book discusses how the Indian stock market works and provides a treasure trove of data for Indian investors. The book starts with the basics of the investment cycle and builds up to the nitty-gritty of bulls and bears, mutual funds, kerb trading, badla finance, and share-price fixing. Included are case studies on asset bubbles and insider trading that are lessons for potential investors on making money while minimizing risks.

This book, written in Dr Lamba's characteristic lucid style, makes stock market investing a non-intimidating, fun activity.

Before you get on with your day, don’t forget to flex those brain muscles with our weekly crypto crossword.

That’s it for now. Thanks for sticking around.

See you later, folks! 👋

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