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Author Topic: Investing in Bitcoin vs. Index Funds (and the FIRE concept)  (Read 1667 times)
DiamondCardz
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June 06, 2015, 07:42:55 PM
Last edit: June 07, 2015, 07:21:16 AM by DiamondCardz
 #1

Please keep all discussions actually relevant and do not stray to the "Bitcoin is God, going to $1000000 a coin by 2016" argument. This is a serious argument about investing in Bitcoin vs. Index Funds (and due to the nature of FIRE, over large time periods).

A good Vanguard index fund - let's say, at least in the UK, the Vanguard (and Vanguard is much more prominent in the US with index funds, with very similar returns AFAIK) LifeStrategy 40 fund, which holds 40% equity 60% bonds, has retrieved an average return of 7.1%/year based on this LifeStrategy pdf. Going up to 80% equity 20% bonds, that becomes 8.4%/year, and at 100% equity that is 8.9%/year.

The market, has on average, always gone up in the long run even if in a short-run financial crisis it has dropped. As an index fund quite literally attempts to equally divest across the market - e.g. the S&P 500 or the FTSE 100, the market going up will result in profits. Let's say that we have a lower risk appetite than most (even though a younger person should invest more in equity than bonds, going to safe(r) funds like this in older age) and we invest in VLS 40. So we're getting a return of 7.1%/year, in the long run, planning for our retirement (something very important). Let's assume an inflation rate of 3%, which is quite high as a lot of countries target inflation rates of 2% themselves, which gives you a real ROI of 4%/year.

That's nice. Yes, there is risk, but there are always busts. We will probably have another bust in the next 10-20 years. In the long run, the booms lead to a higher growth than is lost in the busts.

So, based on this, what is better to invest in - Bitcoin, or Index Funds? Do you believe Bitcoin can manage to appreciate a solid 7%/year against the dollar at least, 4%/year in real terms? Is it too volatile?

Let's discuss. Personally, I love Bitcoin - but I would have to opt with an index fund (probably Accumulation-based) vs. investing directly into Bitcoin. Especially as someone who regularly reads subreddits such as /r/financialindependence and the "Mr. Money Mustache" blog, where being able to get 4%/year real-terms ROI is critical to the plan of Early Retirement. For those unintiated in the FIRE (Financial Independence/Retiring Early) ways, basically you have to get 25x your annual expenses saved and invested. Once you do that, an invest in usually a good index fund, 4%/year real-terms ROI will result in you being able to retrieve your annual expenses annually, hence you can retire early. Requires a lot of frugality and usually a decent degree (say, Computer Science), but the concept is quite nice. I question very much if that'd be possible with Bitcoin, though.

I guess my question also boils down to: Is Bitcoin too volatile to trust with plans like that? In my honest opinion - yes. Does anyone have a differing opinion?

I'm dabbling in Bitcointalk again - I won't be making trades with people. If I try to trade with you, ask for a signature from my address 171717... which I have had control of since about 2015. If I can't provide it, I might have been hacked.
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June 06, 2015, 11:02:16 PM
 #2

It really depends on many factors. Are we talking about a retirement account, or are we talking about discretionary investments? Is your portfolio large, or small?

For a retirement account, I would never invest in Bitcoin. It is much too volatile and a person nearing retirement age cannot afford the losses that volatility might bring. If we are talking about discretionary investments and a large portfolio, I see no reason why Bitcoin could not be a speculative investment in a well diversified portfolio. For most people however Bitcoin is too volatile.

For your average investor, I recommend investing in an index fund until they build a portfolio large enough for diversification. Then, and only then, I see no reason not to use Bitcoin is a speculative investment.

There is nothing wrong with speculative investments as long as you have a well balanced portfolio. Not only will it give you a chance to cash in on a bonanza, should it occur. It also adds a little bit of fun to an otherwise dreary portfolio.

yayayo
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June 06, 2015, 11:54:17 PM
 #3

I'm quite skeptical on multi-decade future projections. You heard it before: Past performance is no guarantee of future gains. So when reading something about a X%/year average return, you simply can't project that into the future. The future may be entirely different than the past. Economy may stay in a depression your whole lifetime - then what?

I think all investing - that includes planning for retirement - involves being active and staying informed on important trends and developments. From my point of view it's safer to it that way than trying to rely on passive income from funds.

ya.ya.yo!
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June 07, 2015, 05:35:47 AM
 #4

How long are you willing to wait for returns?

If you want annual returns, you gotta go with Index Funds.

But, to absolutely get that 7.1% annual return (as the brochure says is expected/possible) you'd have to have your money invested over the same duration of 113 years (1900-2013). That's not to say that you can't achieve those returns, reliably, in shorter time frames it just means that their analysis is made more sound based on the total volume of years they include in the calculation. If you invest for fewer years you increase the risk that your avg. annual return will be something other than 7.1%.

If you're willing to wait for your return, go with bitcoion...because if it goes, it's gonna go far. You just can't consider it a reliable investment yet.

DiamondCardz
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June 07, 2015, 07:19:51 AM
 #5

For your average investor, I recommend investing in an index fund until they build a portfolio large enough for diversification. Then, and only then, I see no reason not to use Bitcoin is a speculative investment.

There is nothing wrong with speculative investments as long as you have a well balanced portfolio. Not only will it give you a chance to cash in on a bonanza, should it occur. It also adds a little bit of fun to an otherwise dreary portfolio.

I see. I agree with you there. It seems a lot of people seem to think putting important sections/quantities of their savings (i.e. their investment money) into Bitcoin is a safe bet though - and while I love Bitcoin, that's a really bad idea.

I'm quite skeptical on multi-decade future projections. You heard it before: Past performance is no guarantee of future gains. So when reading something about a X%/year average return, you simply can't project that into the future. The future may be entirely different than the past. Economy may stay in a depression your whole lifetime - then what?

Yeah, I have heard that before (and indeed, the page of the brochure that interests us i.e. page 5, echoes the sentiment), but I find it extremely unlikely that the economy would go into a depression for that long. The governments of the world do have economic tools to prevent that and if the worst comes to worst they can create new ones with legislation - we wouldn't like it, but they could easily do it. Over a long time period, it is likely you will realize a gain. Productivity is always increasing in the world, the only real way for you to lose money over a long period in an index fund is for the world's productivity to start dropping. That'd be bad. Very bad.

How long are you willing to wait for returns?

If you want annual returns, you gotta go with Index Funds.

But, to absolutely get that 7.1% annual return (as the brochure says is expected/possible) you'd have to have your money invested over the same duration of 113 years (1900-2013). That's not to say that you can't achieve those returns, reliably, in shorter time frames it just means that their analysis is made more sound based on the total volume of years they include in the calculation. If you invest for fewer years you increase the risk that your avg. annual return will be something other than 7.1%.

If you're willing to wait for your return, go with bitcoion...because if it goes, it's gonna go far. You just can't consider it a reliable investment yet.

Of course. The longer time period does mean that it averages out to about 7%, and there are going to be fluctuations (though it is likely that with a higher % in bonds and a lower % in equity, these will be smaller) up and down rather than a solid curve upwards. Obviously, for someone following the FIRE path, these time period will be very long - beginning once they start FIRE plans, and ending when they die because once they retire their income is still coming from this. They might not make profit from it in a year, but that could be offset the next year. It is essentially gambling, but larger numbers result in less variance.

Perhaps. I hold a small quantity of private Bitcoin, but not enough to break the bank if Bitcoin was to hit $0 as I do not consider it reliable.

I'm dabbling in Bitcointalk again - I won't be making trades with people. If I try to trade with you, ask for a signature from my address 171717... which I have had control of since about 2015. If I can't provide it, I might have been hacked.
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June 07, 2015, 07:46:11 AM
 #6

So, based on this, what is better to invest in - Bitcoin, or Index Funds? Do you believe Bitcoin can manage to appreciate a solid 7%/year against the dollar at least, 4%/year in real terms? Is it too volatile?

Definitely index funds. The value of BTC is very volatile right now and it is showing a sign of price declining day by day which most people doesnt notice. Not saying that index funds is the better option for this but I am intended to say that it is indeed the better option for now comparing it to BTC

The value is being manipulated by trader ,one day you could wake up and see that all your BTC would be worthless overnight and the other day you could see that the price increase by X percentage. Another thing is that in order for index funds to lose it worth overnight would be that if the world is going into the war once again but I doubt that going to happen though so Index funds would be the better option for now
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June 07, 2015, 01:38:54 PM
 #7

As others have mentioned, it's not a choice of one or the other - but rather, how best to blend them? All investments are risky, and the best way to reduce risk while earning consistent returns is to build a diversified portfolio.

An index fund, on the one hand, will be up some years and down some years, but never to an extreme. Some years it may go up 10%, and some years it may go down 5%. Over a long period of time, you can reasonably expect a 7% year over year return, with very little risk that it will go to zero. So - low risk, but also mediocre return.

Bitcoin on the other hand, has huge risk and also huge potential for return. On the one hand, there is a legitimate chance that, 20 years from now, it will be worth zero. So don't bet your house on it. On the other hand, there is a real chance that Bitcoin will become a legitimate international currency, with a total market valuation in the trillions. This would represent a 1000x increase in value of an individual Bitcoin.

Therefore, I think the best approach is to have most of your money in traditional investments like index funds and bonds - and allocate a small portion to Bitcoin. Perhaps a few percentage points. If Bitcoin succeeds - awesome - it will be worth more than the rest of your portfolio in 20 years. If not, it will be worth nothing, and you have only lost a few percentage points of your portfolio - no big deal.
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June 07, 2015, 07:50:35 PM
 #8

Every 10+ decade holding investment is a big gamble, but guess what, without that type of gamble no one (generally) gets rich.
The more traditional options are (should be) more secure that Bitcoin, but for me holding Bitcoin for more than 10 years doesn't feel like a gamble, just like it doesn't feel like that for the Winklevoss or anyone that sees the long term impact that Bitcoin can have. Don't wanna end up being the guy that sells his Apple shares for 800 dollars in 1985.
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June 07, 2015, 08:13:26 PM
 #9

I think the difference is that with stocks and related funds you can put some numbers behind the movements.  If earnings go up then generally the stock price will as well.  BUT interest rates are sure to go up soon which should have a negative impact on the price of stocks.  Also corporate earnings have been lowering.  I think that in the short run buying any stocks has a lot of risk because the market is generally overvalued. 

Bitcoins on the other hand are really hard to predict.  I think it can basically be boiled down to how much money is coming in or going out.  This can be really hard to predict with any accuracy.  Past performance of a CEO for a stock can be a good indicator that he will perform similarly in the future.  A company producing good can be researched.  You can find out how much demand there is for the product.  For me bitcoin is more mysterious. You never know what will happen.  As an investment I think it is a high risk-high reward kind of game.  If you hold them long term and they are still around in 10 years then bitcoins will almost certainly be worth a great deal.  But on the other hand you just never know what will happen in the future.  It is risky and as others have said the best thing to do is diversify.
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June 08, 2015, 12:25:37 AM
 #10

Yeah, I have heard that before (and indeed, the page of the brochure that interests us i.e. page 5, echoes the sentiment), but I find it extremely unlikely that the economy would go into a depression for that long. The governments of the world do have economic tools to prevent that and if the worst comes to worst they can create new ones with legislation - we wouldn't like it, but they could easily do it. Over a long time period, it is likely you will realize a gain. Productivity is always increasing in the world, the only real way for you to lose money over a long period in an index fund is for the world's productivity to start dropping. That'd be bad. Very bad.

I do not share your optimism for the times that lie ahead of us. You base your optimism on a (historically) quite short period of time (100-150 years). There have been macro cycles in the past spanning more than 100 years with economic and population decline.

Given the enormous debt burden of most countries in the world and the increase in military tensions worldwide I would certainly not rely on anything "government". The system is more fragile than most people think.

When it comes to investing nothing is guaranteed. Better stay flexible.

ya.ya.yo!
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June 08, 2015, 06:17:14 PM
 #11

I think the difference is that with stocks and related funds you can put some numbers behind the movements.  If earnings go up then generally the stock price will as well.  BUT interest rates are sure to go up soon which should have a negative impact on the price of stocks.  Also corporate earnings have been lowering.  I think that in the short run buying any stocks has a lot of risk because the market is generally overvalued. 

Bitcoins on the other hand are really hard to predict.  I think it can basically be boiled down to how much money is coming in or going out.  This can be really hard to predict with any accuracy.  Past performance of a CEO for a stock can be a good indicator that he will perform similarly in the future.  A company producing good can be researched.  You can find out how much demand there is for the product.  For me bitcoin is more mysterious. You never know what will happen.  As an investment I think it is a high risk-high reward kind of game.  If you hold them long term and they are still around in 10 years then bitcoins will almost certainly be worth a great deal.  But on the other hand you just never know what will happen in the future.  It is risky and as others have said the best thing to do is diversify.

Indeed. Personally I don't see anything in the short-term that should be raising the price of Bitcoin, but obviously that's a different game for the long-term. I'm not a professional in actuarial science - but personally I think the risk of holding Bitcoin is too high for me and the potential reward.

I do not share your optimism for the times that lie ahead of us. You base your optimism on a (historically) quite short period of time (100-150 years). There have been macro cycles in the past spanning more than 100 years with economic and population decline.

Given the enormous debt burden of most countries in the world and the increase in military tensions worldwide I would certainly not rely on anything "government". The system is more fragile than most people think.

When it comes to investing nothing is guaranteed. Better stay flexible.

ya.ya.yo!

A "historically" short period of time, but there isn't much more data than that and we are in a relatively modern society. So to boil it down, you believe that a large amount of countries will collapse economically and in the possibility of a WW3? Because it's worth remembering that we've had WW1, WW2 etc. in the time periods that my optimism is based on, and yet there is still a 4% real-terms annualized return over the time period. In reality, despite the debt burden of many countries, it's unlikely they will simply just collapse (and it is possible that within the next 5-10 years some of these countries may move back into budget surpluses).

I'm dabbling in Bitcointalk again - I won't be making trades with people. If I try to trade with you, ask for a signature from my address 171717... which I have had control of since about 2015. If I can't provide it, I might have been hacked.
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June 08, 2015, 07:31:15 PM
 #12

Bitcoin is an asset like any other asset and it deserves a place in your overall portfolio. However, the same way I wouldn't tell you to put your entire portfolio into General Electric, I wouldn't tell you to put it all into bitcoin. Therefore, the idea of bitcoin vs. index funds is a bad argument because I wouldn't put my money in either of them fully.

Here's how my portfolio would look:
- 5% in bitcoin. I'm young, so I can take the risk. This is more than others will do, but I am comfortable with the risk/reward.
- 65% in dividend growth stocks. These are stocks that have increased their dividend historically. And perhaps it's not just those that grow their dividend, but those that have a lucrative, safe dividend.
- 30% in speculative growth stocks. One stock I've had my eyes on is FB. I wish I had cash in 2013 when the price was a third of its current price. But in the next 5-10 years, I see this company being worth double if not triple its current value. I would buy FB. I would buy a slew of biotech stocks. People are still dying, so they need new medicines.

That's what my portfolio would look like. 35% speculative; 65% relatively safe. And as the dividends come in, I am going to reinvest them in other dividend stocks, other speculative stocks, and other bitcoin.
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June 09, 2015, 01:08:56 AM
 #13

A "historically" short period of time, but there isn't much more data than that and we are in a relatively modern society. So to boil it down, you believe that a large amount of countries will collapse economically and in the possibility of a WW3? Because it's worth remembering that we've had WW1, WW2 etc. in the time periods that my optimism is based on, and yet there is still a 4% real-terms annualized return over the time period. In reality, despite the debt burden of many countries, it's unlikely they will simply just collapse (and it is possible that within the next 5-10 years some of these countries may move back into budget surpluses).

A WW3 would not look the same like WW1 and WW2. But the central problem can be seen in the following graph from Wikipedia:



The problem is population growth or decline. The past 100-200 years were a growth phase - only possible because of modern agriculture (highly dependent on mineral fertilizer). However the population density can not grow forever, because resources are limited. The more the population grows the more likely are conflicts over resources (war).

When the population declines, economies will also contract. In my opinion it's highly likely that we may soon enter a phase of population decline (at least in the industrialized countries). Therefore I don't think it's safe to project past economic growth into the future.

ya.ya.yo!
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June 10, 2015, 06:10:37 AM
 #14

Index funds have low yearly profit. It is may be suitable for banks only. 7 - 9% per year is nothing, if you want to make profit.  Smiley
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June 11, 2015, 04:46:59 PM
 #15

Index funds have low yearly profit. It is may be suitable for banks only. 7 - 9% per year is nothing, if you want to make profit.  Smiley

I'm building on the FIRE concept though, so I'm more balancing the risk/reward. Bitcoin does definitely have the potential to go to high places, but right now I don't believe it is going to - it's in a price decline after the $1000-or-so bubble and it's quite volatile. I like the technology, love the economy, just can't recommend investing in it.

I'm dabbling in Bitcointalk again - I won't be making trades with people. If I try to trade with you, ask for a signature from my address 171717... which I have had control of since about 2015. If I can't provide it, I might have been hacked.
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June 13, 2015, 03:03:03 AM
 #16

Based on historical performance, even 1% of bitcoin exposure in portfolio will give you a potential return of 25% for the whole portfolio per year. Of course that was largely due to two waves of technology shift, without significant technology breakthrough in sight, the growth will slow down a bit

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June 13, 2015, 07:37:20 AM
 #17

Index funds have low yearly profit. It is may be suitable for banks only. 7 - 9% per year is nothing, if you want to make profit.  Smiley

I'm building on the FIRE concept though, so I'm more balancing the risk/reward. Bitcoin does definitely have the potential to go to high places, but right now I don't believe it is going to - it's in a price decline after the $1000-or-so bubble and it's quite volatile. I like the technology, love the economy, just can't recommend investing in it.

actually bitcoin is facing again one of its low volatility, it's a good time to invest in it for the long term, i would say this is the best time to do so

the problem that many are facing now it is the burn from the 1200 ath, a fake manipulation ath..., is forcing people to believe that bitcoin is doomed and despite its potentiality it is not worth considering for a long term investment

you should ignore what happened back then, do not let the past influences your future decision and if you really think that bitcoin has potential, like everyone else, that isn't a troll, then the only thing to do is investing
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June 13, 2015, 07:42:06 AM
 #18

Invest in Bitcoin with 5% Profit/week
I do that and succes make some money Smiley

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June 14, 2015, 07:39:03 AM
 #19

Invest in Bitcoin with 5% Profit/week
I do that and succes make some money Smiley

Are you speculating it? I think the OP is seeking long term stable investment tool, not for the short term. First we should define bitcoin! Is it money or investment? If it means to be money, the volatile price scares the massive ppl away! If it means to be investment, the price drop a lot from the peak in 2013. Who knows whether it will decline in the future? It is still be risky investment and it is the reason many wall street don't recommend it!


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