If you’re lucky enough to find yourself in possession of a bundle of cash that isn’t immediately needed to pay bills, you have some thinking to do. How to use that money? Whether it came your way via an on-the-job bonus, an inheritance, or an unexpected refund, you have the opportunity to put it to work for you in a variety of ways.
Instead of going on a shopping spree, you could deploy the funds to improve your financial situation and build wealth. Options include paying down debt, contributing to retirement goals, and beyond. Read on to learn the full story.
The Opportunity of Extra Money
At some point, you may find some extra money heading your way. Perhaps you get a bonus for wrangling a complicated project at work. Or you didn’t realize that you’d overpaid your taxes one year. Or maybe an inheritance comes your way.
When funds turn up that you weren’t expecting, it may be tempting to buy a bunch of cool items you’ve been admiring or to take friends and family out to a lavish meal or away for a weekend. But then, once that cash is gone, there’s no getting it back.
Instead, you might look at the money as a means to enrich your financial standing. (Or use most of it that way, and go shopping with a small amount of it.)
A windfall can be a once-in-a-blue-moon opportunity to pay off debt or plump up your emergency fund. It can help you boost your retirement savings or kick your savings for a future goal into high gear.
Yes, it takes discipline to put that money to work vs. splashing out with it at your favorite store. But doing so can have a long-term positive impact on your finances.
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1. Build a Solid Emergency Fund
If your emergency fund is low (or nonexistent), you might use your new windfall to build it up.
Having an emergency fund gives you a financial cushion, along with the sense of security that comes with knowing you can handle a financial set-back (such as a job loss, medical expenses, or costly car or home repair) without hardship.
Having this buffer can also help you avoid having to rely on credit cards for an unexpected expense and then falling into a negative spiral of high interest debt.
How Much to Save in an Emergency Fund
A general rule of thumb is to keep three to six months’ of monthly expenses in cash as an emergency fund. Two-income households may be able to protect themselves with three months’ worth of savings. If you’re single, however, you may want to aim closer to having six months’ worth of living expenses saved up.
Consider keeping your emergency fund in a separate high-yield savings account, such as a money market account, online saving account, or a checking and savings account. These options typically offer higher interest rates than a standard savings account, yet allow you to access the money when you need it.
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2. Tackle High-Interest Debt
While mortgage loans and car loans tend to offer lower interest rates since they’re secured by collateral, the same can’t be said of unsecured debts, such as credit card balances, student loans, and personal loans. Credit card debt can be especially hard to pay off, given that the current average interest rate is over 20%.
If you carry any credit card or other high-interest debt, you might want to use your windfall to jumpstart a strategic debt payoff plan, such as the debt avalanche or debt snowball method, in order to pay it off as quickly as possible.
Strategies for Paying Down Debt
The avalanche method involves ranking your debts by interest rate. You then put any extra money you have towards paying off the debt with the highest interest rate (while continuing to pay the minimum on other debts). After the balance with the highest interest rate has been completely paid off, you move on to the next highest interest-rate balance (again, putting as much money as you can toward it), and then move down the list until your debt is repaid.
With the snowball method, you focus on paying off your smallest debt first (while paying the minimum on your other debts). Once that balance is paid off, you take the funds you had previously allocated to your smallest debt and put them toward the next-smallest balance. This cycle repeats until all of your debt is repaid.
Using your extra cash to pay off debt has added benefits. You may build your credit score as your credit utilization ratio (the amount of available credit you’ve used vs. your credit limit) goes down.
In addition, once you clear your debt, you won’t have to budget for debt payments anymore, which is essentially getting extra cash all over again.
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3. Invest in Retirement Accounts
Here’s another idea for what to do with extra money. You might use it to grow your retirement accounts. There are a couple of options to consider here.
401(k) and Employer Match
Does your employer offer a 401(k) with matching contributions? If so, this can be a powerful tool to help you save for retirement.
Not only does a 401(k) help lower your taxes (since this money comes out of your salary before taxes are deducted), your employer’s matching contributions are essentially free money and can provide a nice boost to your retirement savings.
If you’re not currently taking full advantage of matching funds, you may want to adjust your contributions to help ensure you’re making the most of this benefit. And if a windfall comes your way, you may want to deposit it right into your account.
Start or Fund an IRA
What do you do if you don’t have a company plan or you’ve hit your contribution limit there? You might consider using your new influx of cash to open up (or add to) an individual retirement account (IRA).
While retirement may feel a long way off, starting early can be a smart idea, thanks to the magic of compound earnings (that’s when the money you invest earns interest/dividends, those earnings then get reinvested and also grow).
There is also a possible immediate financial benefit to investing in an IRA: Just as with a 401(k), your IRA contributions can possibly reduce your taxable income, which means that any money you put in this year can lower your tax bill for this year.
You’ll want to keep in mind, however, that the federal government places limitations on how much you can contribute each year to retirement funds.
A little windfall can offer a nice opportunity to buy investments that can possibly help you create additional wealth over time.
Stock Market Investments
For long-term financial goals (outside of retirement), you might consider opening up a brokerage account. This is an investment account that allows you to buy and sell investments like stocks, bonds, and funds like mutual funds and exchange-traded funds (ETFs).
A taxable brokerage account does not offer the same tax incentives as a 401(k) or an IRA but is much more flexible in terms of when the money can be accessed.
Though all investments come with some risk, generally the longer you keep your money invested, the better your odds of overcoming any down markets. Your investment gains can also grow exponentially over time as your earnings are compounded. Worth noting: Past performance doesn’t guarantee future return, and while your money may be insured against broker-dealer insolvency, it is not insured against loss.
While investing can seem intimidating, a financial planner can be a helpful resource to help you create an investment strategy that takes into consideration your goals and risk tolerance.
Real Estate Investments
Another option might be to look into real estate investments. One possibility: REIT investing, which stands for Real Estate Investment Trust. This is a kind of company that operates or owns income-generating properties.
You can buy shares of REITs as a way of investing in different aspects of the real estate market, and you can do so for small amounts vs. buying an actual property. In this way, REITs can make it possible for people to affordably invest in real estate projects, including those involving large-scale construction.
5. Save for Future Goals
Still wondering what to do with extra money? If you already have a solid emergency fund and your retirement account is growing nicely, you may want to think about what large purchases you are hoping to make in the next few years. That could be buying a new car, accruing a down payment for a home, doing a renovation project, or going on a family vacation.
A lump sum of cash can be a great way to jumpstart saving for your goal or, if you’re already saving, to quickly beef up this fund.
Short-Term vs. Long-Term Goals
When thinking about goals, it can be helpful to divide them into short-term goals and long-term ones. Typically, short-term goals are ones you want to achieve within a year, while long-term ones are those that have a longer runway to save.
So a short-term goal might be saving for a vacation next year, and a long-term one could be accumulating enough money for a down payment on a property.
Creating a Savings Plan
For things you want to buy or do in the next few months or years, consider setting up multiple bank accounts so you have a separate savings account that is safe, earns competitive interest, and will allow you to access the money when you’ve reached your goal.
Some good options include a high-yield savings account at a bank, an online savings account, a checking and savings account, or a certificate of deposit (CD).
Keep in mind, though, that with a CD, you typically need to leave the money untouched for a certain period of time or else pay a penalty.
The options directly above may also be a good place to put your extra money as you save up for a longer-term goal. But you might also look into whether there are suitable investments (see #4 on this list) that involve a bit more risk but offer potentially higher reward.
The Takeaway
Wondering what to do with a lump sum of extra money is a good problem to have.
Some options you might want to consider include: setting up an emergency fund, paying down high-interest debt, starting a savings account earmarked for a large purchase, or putting the money into your retirement fund or another type of long-term investment.
If you are looking for a place to bank your funds for a future goal, compare account features, such as the annual percentage yield (APY) offered and fees assessed.
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Investing is a lot like riding a roller coaster. Some love the thrill of taking big risks with the possibility of getting even bigger rewards. Others get anxious with every market dip and downturn.
Knowing yourself and your risk tolerance is an essential part of investing. Of course, it’s good to have a diversified portfolio built with your financial goals in mind. Still, the products and strategies you use should ideally fall within guidelines that make you feel comfortable—emotionally and financially—when things get rough.
Otherwise, you might resort to knee-jerk decisions—selling at a loss or abandoning your plan to save—that could cost you even more.
What is Risk Tolerance?
Risk tolerance is the amount of risk an investor is willing to take to achieve their financial goals. Risk tolerance level comprises three different factors: risk capacity, need, and emotional risk.
Risk capacity is the ability to handle risk financially. Unlike your emotional attitude about risk, which might not change as long as you live, your risk capacity can vary based on your age, your personal financial goals, and your timeline for reaching those goals. To determine your risk capacity, you need to determine how much you can afford to lose without affecting your financial security.
For example, if you’re young and have plenty of time to recover from a significant market loss, you may decide to be aggressive with your asset allocation; you may invest in riskier assets like stocks with high volatility or cryptocurrency. Your risk capacity might be larger than if you were older and close to retirement.
For an older investor nearing retirement, you might be more inclined to protect the assets that soon will become part of your retirement income. You would have a lower risk capacity.
Additionally, a person with a low risk capacity may have serious financial obligations (a mortgage, your own business, a wedding to pay for, or kids who will have college tuition). In that case, you may not be in a position to ride out a bear market with risky investments. As such, you may use safer investments, like bonds or dividend stocks, to better protect your portfolio.
On the other hand, if you have additional assets (such as a home or inheritance) or another source of income (such as rental properties or a pension), you might be able to take on more risk because you have something else to fall back on.
The next thing to look at is your need. When determining risk tolerance, it’s important to understand your financial and lifestyle goals and how much your investments will need to earn to get you where you want to be.
The balance in any investment strategy includes deciding an appropriate amount of risk to meet your goals. For example, if you have $100 million and expect that to support your goals comfortably, you may not feel the need to take huge risks. When looking at particular investments, it can be helpful to calculate the risk-reward ratio.
But there is rarely one correct answer. Following the example above, it may seem like a good idea to take risks with your $100 million because of opportunity costs — what might you lose out on by not choosing a particular investment.
Emotional Risk
Your feelings about the ups and downs of the market are probably the most important factor to look at in risk tolerance. This isn’t about what you can afford financially — it’s about your disposition and how you make choices between certainty and chance when it comes to your money.
Conventional wisdom may suggest “buy low, sell high,” but emotions aren’t necessarily rational. For some investors, the first time their investments take a hit, fear might make them a little crazy. They may lose sleep or be tempted to sell low and put all their remaining cash in a savings account or certificate of deposit (CD).
On the flip side, when the market is doing well, investors may get greedy and decide to buy high or move their safe investments to something much more aggressive. Whether it’s FOMO trading, fear, greed, or something else, emotions can cause any investor to make serious mistakes that can blow up their plan and forestall or destroy their objectives. A volatile market is a risk for investors, but so is abandoning a plan that aligns with your goals.
And here’s the hard part: it’s difficult to know how you’ll feel about a change in the market — especially a loss — until it happens.
Three Levels of Risk Tolerance
Generally, investors fall into one of three categories regarding investment risk tolerance: aggressive, moderate, and conservative.
While the financial industry tends to use labels like conservative, moderate, or aggressive to describe risk in the context of investments and investors, those terms are subjective. What they mean to you may differ from what they mean to someone else.
It can put things into better perspective to think of a potential loss in terms of dollars, not percentages. A 15% loss might not sound so bad, but if you think of it as having $10,000 one month and $8,500 the next, that’s a little more daunting.
Aggressive Risk Tolerance
People with aggressive risk tolerance tend to focus on maximizing returns, believing that getting the largest long-term return is more important than limiting short-term market fluctuations. If you follow this philosophy, you will likely see periods of significant investment success that are, at some point, followed by substantial losses. In other words, you’re likely to ride the full rollercoaster of market volatility.
Moderate Risk Tolerance
An investor with a moderate risk tolerance balances the potential risk of investments with potential reward, wanting to reduce the former as much as possible while enhancing the latter. This investor is often comfortable with short-term principal losses if the long-term results are promising.
Conservative Risk Tolerance
A person with conservative risk tolerance is usually willing to accept a relatively small amount of risk, but they truly focus on preserving capital. Overall, the goal is to minimize risk and principal loss, with the person agreeable to receiving lower returns in exchange.
Assessing Your Risk Tolerance for Retirement Investing
There are steps you can take and questions to ask yourself to determine your risk tolerance for retirement investing. Once you know your risk preference, you can open a retirement account with confidence. Both low risk tolerance and high risk tolerance investors may want to walk through these steps to ensure they know what retirement investment style is right.
Matching your 401(k) risk amount to your personality traits can help you stick to your strategy over the long haul.
1. What will your income be? If you expect your salary to ratchet higher over the coming years, then you may want to have a higher 401(k) risk level, as time in the market can help you recover from any losses. If you are in your peak-earning years and will retire soon, then toning down your risk could be a prudent move, since you don’t want to risk your savings this close to retirement.
2. What will your expenses look like? If you anticipate higher expenses in retirement, that might warrant a lower risk level since a sharp drop in your assets could result in financial hardship. If your expenses will likely be low (and your savings rate is high), then perhaps you can afford to take on more retirement investing risk.
3. Do you get nervous about the stock market? Those who cannot rest easy when stocks are volatile are likely in a lower-risk, lower-return group. But if you don’t pay much attention to the swings of the market, you might be just fine owning higher-risk, higher-return stocks.
4. When do you want to retire? Your time horizon is a major retirement investing factor. The more time you have to be in the market, the more you should consider owning an aggressive 401(k) risk portfolio. Those in retirement and who draw income from a portfolio are likely in the low risk-tolerance bucket, since their time horizon is shorter.
The Takeaway
Each investor may have a unique level of risk tolerance, though generally, the levels are broken down into conservative, moderate, and aggressive. The fact is, all investments come with some degree of risk—some greater than others. No matter your risk tolerance, it can be helpful to be clear about your investment goals and understand the degree of risk tolerance required to help meet those goals.
Investors may diversify their investments into buckets — some safer assets, some intermediate-term assets, and some for long-term growth — based on their personal goals and timelines.
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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
When Bitcoin launched in 2009, it didn’t have much — or any — competition in the newly minted realm of digital currency. By 2011, though, new types of cryptocurrency began to emerge as competitors adopted the blockchain technology that bitcoin was built on to launch their own platforms and currencies. Suddenly the race to create more crypto was on.
The rest, as they say, is history. The rush toward crypto is a financial services explosion that doesn’t affect a single country only, but one that has captured the entire world. To say that cryptocurrency is popular today is an understatement.
One of the reasons cryptocurrency has seized the hearts, minds, and wallets of so many people is the innovative nature of its blockchain technology. It’s impressive that blockchain and the concept of decentralization can apply not only to finance, but to so many other industries, needs, and uses in our society.
Then there’s the sheer speed of blockchain technology; money transfers abroad, for example, that used to take between 3-and-5 days via wire transfer can occur almost instantly — or as long as a few minutes, on a slow day — with blockchain. The list of reasons for crypto’s popularity seems endless. Crypto exemplifies numerous traits that appeal to both the human imagination and our everyday needs.
In this article, we examine cryptocurrencies in detail, discuss their various types, and highlight 20 coins that are popular today. Of course, all things crypto change as fast as the speed of blockchain. So, this list may already be obsolete after it’s published; but don’t worry, we’ll keep you updated.
Today there are thousands of different cryptocurrencies in the world, and while each is designed to provide some new feature or function, most are founded on principles similar to those of Bitcoin:
• Cryptocurrencies are not issued, regulated, or backed by a central authority like a bank or the government. They are decentralized, not centralized.
• Cryptocurrencies are created using a distributed ledger (blockchain) and peer-to-peer (P2P) review.
• Bitcoin and other coins are encrypted (secured) with specialized computer code called cryptography.
• As assets, cryptocurrencies are generally stored in digital wallets, commonly a blockchain wallet, which allows users to manage and trade their coins.
As of March 2022, there were more than 18,000 different types of cryptocurrencies, for a total market capitalization (market cap) for all cryptocurrencies of $2 trillion.
Also, in March 2022, approximately 8% of the United States population participated in cryptocurrency trading. And, as a continent, Asia had more than four time more crypto users than did any other continent.
Why Are There So Many Different Cryptocurrencies?
Bitcoin might have been conceived as an alternate means of exchange (like money), but using crypto as a currency is not legal in all parts of the world, and in some countries, crypto is restricted, or banned altogether. So, many of the 18,000 types of crypto are not used as money or currency at all.
Developers can build almost anything using powerful blockchain technology. Some crypto coins are used as investment vehicles, stores of value that may be bought, sold, or traded on crypto exchanges.
Many other crypto platforms have purposes that go far beyond acting as an exchange of value. Blockchain, in fact, can offer solutions to longstanding problems in many sectors of the economy besides finance including agriculture, cybersecurity, fine art, gaming, healthcare, insurance, law, medicine, real estate, and supply chain management.
Another reason there are so many types of cryptocurrencies could lay in the fear of missing out (FOMO) factor. Encouraged by crypto’s rapid growth of the past few years, in an effort to get in on any potential profit, entrepreneurs are continuously unleashing huge numbers of new coins to the crypto market.
What Are the Different Types of Crypto?
Although some people use the terms crypto, coins, and tokens interchangeably, they are not the same things. To gain a basic understanding of cryptocurrency, it’s important to understand how these terms differ from one another.
Cryptocurrencies generally fall into one of two categories:
• Coins: Can include Bitcoin and altcoins (all cryptocurrencies other than Bitcoin)
• Tokens: Programmable assets that live within the blockchain of a given platform
The term altcoin refers to all cryptocurrencies other than Bitcoin. Some main types of altcoins include mining-based cryptocurrencies, stablecoins, security tokens, and utility tokens.
What Are Crypto Coins?
Crypto coins are strings of computer code that can represent an asset, concept, or project — whether tangible, virtual, or digital — intended for various uses and with varying valuations. Originally, these coins were meant to function as a type of currency.
Cryptocurrencies are not like fiat currencies, e.g., the dollar, euro, or yen. Fiat money is tangible; it’s governed by central authorities, and it operates as a store of value: You can exchange any fiat for goods and services. But cryptocurrencies — including the various types of coins we discuss here — can serve many purposes beyond that of currency. Cryptocurrency as “currency” is a usage that only grazes the surface of blockchains’ capabilities. Because they are built on blockchain tech, some cryptos can offer solutions to long-standing problems in almost every sector of our economy.
What Are Tokens?
Tokens are usually created and distributed through an initial coin offering (ICO), much like an initial public offering (IPO) for stock. They can be represented as:
Like American dollars, tokens represent value, but they are not exactly valuable themselves, in the same way a paper dollar’s value may not be $1. But tokens can be used in transactions for other things.
A token differs from a coin in the way it’s constructed within the blockchain of an existing coin, like Bitcoin or Ethereum.
Crypto Coins vs Tokens
When discussing cryptos, you’ll see the terms coin and token. Some people use them interchangeably, but that’s a mistake. They are not interchangeable, and it’s important to know the difference between a coin and a token.
While coins and tokens are considered forms of cryptocurrency, they provide different functions. Coins are built on their own blockchain and were originally intended as a form of currency. Generally, any blockchain-based cryptocurrency that is not Bitcoin is referred to as an altcoin (more on those below).
A digital coin is created on its own blockchain and acts much like fiat (traditional money). Coins can be used to store value and as a means of exchange between two parties doing business with each other. Examples of coins include Bitcoin and Litecoin.
But tokens — which are created on an existing blockchain (not their own) — can function in many more ways than acting as currency. Instead of representing an exchange of value, tokens are considered programmable assets on which you may create and execute unique smart contracts. These contracts can establish ownership of assets outside the blockchain network.
Tokens can represent units of value — including real-world items like electricity, money, points, coins, digital assets, and more — and can be sent and received. Ether (ETH), which is used to make transactions on the Ethereum network, is a token. In another example, the Basic Attention Token (BAT), also built on Ethereum, is used in digital advertising.
Tokens can be used as part of a software application — such as granting access to an app, verifying identity, or tracking products moving through a supply chain. They can also represent digital art — as with non-fungible tokens (NFTs). There have even been experiments using NFTs to represent physical assets, such as real-life art, and real estate.
What Are Altcoins?
The term altcoin began as shorthand for alternative to Bitcoin, and most altcoins were launched to improve upon Bitcoin in some way. Some examples of altcoins are Namecoin, Litecoin, Peercoin, Ethereum, and USD Coin.
Like Bitcoin, some cryptocurrencies have a limited supply of coins — which helps create demand and reinforce their perceived value. For example, there is a fixed number of bitcoins that can be created — 21 million, as decided by the creator(s) of Bitcoin.
Though most altcoins are built on the same basic framework as Bitcoin and share some of its characteristics, each altcoin offers slightly different traits. Some altcoins use a different process to produce and validate blocks of transactions. Some might offer new features, like smart contracts or an advantage, like less price volatility.
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The 17 Largest Cryptocurrencies By Market Cap, as of June 25, 2022
Below is a list of the 20 biggest cryptocurrencies arranged by market capitalization (market cap) — highest first — according to CoinMarketCap on Jun 25, 2022. Bitcoin (BTC) is the clear leader in the cryptocurrency sector, with a market capitalization of $407,387,696,36, followed by Ethereum (ETH), at $149,402,716,985.
Biggest Is Not Necessarily Best, But…
It’s difficult to know which are the best cryptos — especially when there are so many virtual currencies with wildly varying prices. But quantitative metrics like market cap and others can help us attach comparative value to these myriad cryptocurrencies. Bitcoin, Ethereum, and some of the largest altcoins out there are top-tier options because of their scalability, privacy, and the scope of functionality they support.
Market Cap For Valuing Cryptos?
Borrowed from traditional finance (TradFi), market cap is an essential metric because it helps investors and analysts form a rough estimate of a crypto’s stability. A coin with a much larger market cap than its peers has the potential to be a more stable investment than one with a much smaller market cap. Digital currencies with smaller market caps are more susceptible to the whims of the market; they have the potential to experience dramatic gains or losses.
To calculate a cryptocurrency’s market cap you multiply its current price by the total number of coins in circulation.
Prices of cryptocurrencies are continuously changing — every moment of every day. The global crypto market is open for trading 24/7. As such, data like these are obsolete the moment they’re published. CoinMarketCap publishes price changes of cryptocurrencies in real time daily.
Finally, note that, in the list below, the name of the blockchain platform may be different from its digital currency.
Bitcoin in the clear leader in the crypto sector. It is also the very first cryptocurrency. Bitcoin launched in 2009; created by a person (or possibly a group) that goes by the pseudonym Satoshi Nakamoto. As of June 2022, there are slightly more than 19 million Bitcoin tokens in circulation, against a capped limit of 21 million. Almost a thousand new bitcoins are mined each day, bringing Bitcoin ever closer to its maximum finite number.
Bitcoin was designed to be independent of any government or central bank. Instead, it relies on blockchain technology, a decentralized public ledger that contains a digital record of every Bitcoin transaction. Bitcoin established the basic system of cryptography and consensus — i.e., peer-to-peer (P2P) verification — that is the foundation of most forms of crypto today.
As a reminder, a P2P network structure in blockchain technology is generally decentralized and designed to operate in the best interest of all parties involved, as opposed to benefitting a centralized entity primarily. A peer-to-peer blockchain network connects different computers (or nodes) together, so they can function in unison. Ideally, P2P platforms are censorship resistant, open, public networks, which allow important data and other functionalities to be shared.
Bitcoin miners use powerful computers to verify blocks of transactions and generate more bitcoins. Bitcoin mining uses a complex, time-consuming process called proof of work (PoW). The transactions are logged permanently on the blockchain — which helps to validate and secure each bitcoin and the network as a whole. Recently, the vast amount of energy required to create Bitcoin has raised concerns about environmental pollution.
Like Bitcoin, Ethereum is a blockchain network. But Ethereum was designed as a programmable blockchain — meaning it wasn’t created to support a currency, but rather to enable the network’s users to create, publish, monetize, and deploy decentralized applications (dApps). Ether (ETH), the native Ethereum currency, was developed as a form of payment on the Ethereum platform. It might be helpful to think of ETH as a kind of fuel that powers the Ethereum blockchain. Ethereum has helped to launch many initial coin offerings because many ICOs are built on the Ethereum blockchain. Ethereum has also been the blockchain behind the boom in non-fungible tokens (NFTs).
As the two most widely known blockchains and cryptocurrencies, many people often directly compare Ethereum and Bitcoin against each other. In reality, Bitcoin and Ethereum are designed to achieve different goals, and in many ways can be regarded as complementary forces. Bitcoin is a peer-to-peer digital cash network, which facilitates transactions without the need for a central authority. This novel network architecture has paved the way for the complex blockchain ecosystem that we have today. Ethereum, often referred to as the world computer, iterates on Bitcoin’s technology while introducing smart contracts. Smart contracts allow for building dApps that span a broad range of crowdfunding platforms, financial instruments, digital games and collectibles, and decentralized marketplaces.
As of June 2022, Ether was the number two virtual currency, behind Bitcoin. Also like BTC, ETH is generated using a PoW system. But unlike Bitcoin, there is no limit to the number of ETH that can be created.
3. Tether (USDT)
• USDT—Crypto Type: Stablecoin
• Market Cap (06/25/22): $66,837,248,865
Tether was the first cryptocurrency marketed as a stablecoin — a breed of crypto known as fiat-collateralized stablecoins. The value of the tether is pegged to a fiat currency — in this case, the U.S. dollar. Tether is the world’s largest stablecoin; in 2022, the majority of cryptocurrencies traded using tether.
Like other stablecoins, tether is designed to offer stability, transparency, and lower transaction fees to users. Tether was not meant to be a speculative investment like some cryptocurrencies; originally, investors who wanted to avoid the extreme volatility of the crypto market used USDT. Tether is pegged to the U.S. dollar (which is why the ticker is USDT), and it allegedly maintains a 1:1 value with the dollar, although this claim has come under some scrutiny.
Many believe that Tether is the lifeblood of the crypto ecosystem. They’re concerned that if Tether implodes, then the entire system would crash.
In May 2022, that’s exactly what happened: Tether lost its peg to the dollar briefly, and all cryptocurrencies plummeted. In part, this was a result of another stablecoin, terraUSD (USD) falling below 30 cents. The wave of panic in the broader crypto market was palpable. Because of this crash, many crypto investors tried to redeem their tethers, others tried to exit the asset class altogether, and many lost their investments.
4. USD Coin (USDC)
• USDC Crypto Type: Stablecoin
• Market Cap (06/25/22): $55,887,416,457
USD Coin (USDC) is a digital stablecoin pegged to the U.S. dollar. It operates on the Ethereum and Stellar blockchains. USDC was initially created by the Centre consortium, which includes its two main founding members, Circle and Coinbase. Each USDC token is backed by $1 held in reserve and regularly audited by Grant Thornton, a major accounting corporation. USDC was launched in September 2018, and during March 2021 it was announced that Visa would facilitate the use of USDC for settlement on its payment network.
USDC is a stablecoin that runs on the Ethereum blockchain and several others. It is pegged to the U.S. dollar. Like the stablecoin tether (USDT) described above, a USDC is worth one U.S. dollar — the guaranteed 1:1 ratio making it a stable form of exchange.
Various stablecoins have proliferated as the crypto ecosystem has developed, and many are now an essential part of the market. How a stablecoin maintains its stability — known as its peg — is dependent on its infrastructure. Stablecoins can be issued by a centralized institution or collateralized in a decentralized way. They can even use one of numerous algorithmic mechanisms to maintain a stable price.
The goal of having a stablecoin like USDC is to make transactions faster and cheaper. While there are questions about whether the tether stablecoin is fully backed by U.S. dollar reserves, some investors believe that USDC is more transparent: Its reserves are monitored by the American arm of Grant Thornton, LLC, a global accounting firm. On March 29, 2021, Visa announced the use of USDC to settle transactions on its payment network. As of June 2022, there were 55.09 billion USDC in circulation.
Binance is one of the world’s biggest cryptocurrency exchanges. The Binance Coin (BNB) was created as a utility token for use as a medium of exchange on Binance. It was initially built on the Ethereum blockchain, but now lives on Binance’s own blockchain platform. Originally, BNB allowed traders to get discounts on trading fees on Binance, but now it also can be used for payments, to book travel, for entertainment, online services, and financial services.
As one of the top five cryptocurrencies by market cap in 2022, BNB has developed a wide range of use cases and real-world applications. But, as with other digital assets, this crypto platform has also faced regulatory hurdles here and abroad.
BNB was created with a maximum of 200 million tokens, about half of which were made available to investors during its ICO. Every quarter, to drive demand, Binance buys back and then “burns” — permanently destroys, or removes from circulation — some of the coins it holds. A project burns its tokens to reduce the overall supply. The motivation is often to increase the value of the remaining tokens, as assets tend to rise in price whenever the circulating supply falls, and they become more scarce.
6. XRP (XRP)
• XRP—Crypto Type: Coin
• Market Cap (06/25/22): $17,768,795,974
XRP is the native coin of the Ripple Ledger Network. It is designed to be a medium of exchange and value transfer, and is intended to be used as a low-cost bridge between fiat currencies for a broad range of global transactions.
XRP enables a system that can outperform many established cryptocurrencies and fiat transmission technologies. This has led to a world-class payments system that minimizes intermediary processes and enhances the overall benefit to its users.
XRP was developed by Ripple Labs, Inc. And while some people use the terms XRP and Ripple interchangeably, they are different. Ripple is a global money transfer network used by financial services companies. XRP is the crypto that was designed to work on the Ripple network. You can buy XRP as an investment, as a coin to exchange for other cryptocurrencies, or as a way to finance transactions on Ripple.
Unlike Bitcoin and many other cryptocurrencies, XRP cannot be mined; instead, there is a limited number of coins — 100 billion XRP — that already exist. Also, XRP doesn’t rely on a complex digital verification process via blockchain the way Bitcoin and others do. The Ripple network employs a unique system for validating transactions in which participating nodes conduct a poll to verify transactions. This makes XRP transactions faster and cheaper than Bitcoin.
7. Binance USD (BUSD)
• BUSD—Crypto Type: Stablecoin
• Market Cap (06/25/22): $17,365,183,938
Binance USD (BUSD) is the stablecoin developed and employed by the Binance exchange platform. BUSD is pegged at a 1:1 ratio to the U.S. dollar and was initially deployed on the BNB Chain. BUSD is also interoperable with other blockchains such as Ethereum, and can be used for various DeFi applications and value transfers between blockchains. BUSD is one of the largest USD-pegged stablecoins in the world, with a market cap of approximately USD 18 billion (as of June 25, 2022).
Binance USD (BUSD) is a 1:1 USD-backed stable coin issued by Binance (in partnership with Paxos). BUSD is approved and regulated by the New York State Department of Financial Services (NYDFS). Launched in September 2019, BUSD aims to meld the stability of the dollar with blockchain technology. It is a digital fiat currency, issued as an ERC-20 token and supports BEP-2.
Based on their price stability, stablecoins plays an important role in transactions, payments and settlement, and decentralized finance (DeFi). Here are some things you can do with BUSD:
• Transfer BUSD anywhere in minutes at low cost on the blockchain
• Trade it on different centralized and decentralized exchanges (DEXs)
Dogecoin (pronounced dohj-coin) is widely known as the first joke cryptocurrency; it was launched in 2013 as a way to poke fun at Bitcoin. Nonetheless, the currency captured people’s attention and a fair amount of investment. In April 2019, a tweet from Elon Musk indicated he had a positive view of Dogecoin, which further raised Dogecoin’s profile as a legitimate cryptocurrency.
Dogecoin is an altcoin similar to Bitcoin and Ethereum in that it runs on a blockchain network using a PoW system. But the number of coins that can be mined are unlimited (versus the 21 million-coin cap on Bitcoin).
Dogecoin has been used primarily as a tipping system on Reddit and Twitter to reward the creation or sharing of quality content. You can get tipped Dogecoin by participating in a community that uses the digital currency, or you can get your Dogecoin from a Dogecoin faucet. A Dogecoin faucet is a website that will give you a small amount of Dogecoin for free as an introduction to the currency, so that you can begin interacting in Dogecoin communities.
Dogecoin is also associated with some headline moments in crypto — for example, investors paid the equivalent of about $30,000 in Dogecoin to help send the Jamaican bobsled team to the Winter Olympics in 2014.
Despite its place as one of the biggest coins by market cap, DOGE trades at one of the lowest prices: $0.072 cents, as of June 25, 2022.
Gavin Wood co-founded Polkadot — he also co-founded Ethereum — to take the capabilities of a blockchain network to another level. The blockchain’s cryptocurrency is called DOT. Since its launch in 2020, the Polkadot platform has become one of the bigger crypto networks in a relatively short time.
Polkadot operates using two blockchains — the main relay network, where transactions are permanent, and a parallel network of user-created blockchains, called parachains. Parachains are Polkadot-based independent blockchains that connect to and run off of Polkadot’s main blockchain (relay chain).
Parachains process transactions via sharding — splitting a blockchain into multiple pieces, or shards, and storing that separated data across multiple different computers. In this way, the computational burden on each computer is lessened. The network can process a larger volume of transactions — than if the sharding had not occurred — at extremely fast transaction times. Parachains can be customized for myriad uses like building apps; they can support other coins, and may benefit from the main blockchain’s security.
What differentiates Polkadot from other blockchains is its core mission to solve the problem of interoperability by building so-called bridges between blockchains. Polkadot is not the only system trying to act as a translator to help blockchains talk to one another.
10. Dai (DAI)
• DAI—Crypto Type: Token (originally), Now a Coin
• Market Cap (06/25/22): $6,812,982,370
Dai (DAI) is one of two native cryptocurrencies of the Maker Protocol, an open-source software application maintained by the Maker distributed autonomous organization (MakerDAO).
DAI, is a decentralized stablecoin — meaning that it’s not managed by a central authority or organization, but by smart contracts. It’s also soft-pegged to the U.S. dollar — it’s correlated to USD but not backed by actual dollars — to try to keep its value relatively steady compared with other cryptos. The utility and governance token of MakerDAO is MKR, which is used to stabilize the price of Dai crypto.
Dai was created to facilitate crypto lending, which is the main focus of the Maker protocol. But as an ERC20 token, Dai crypto also offers a wide range of possible use cases on Ethereum, including the creation of smart contracts.
Dai (DAI) is a collateral-backed cryptocurrency, one that attempts to maintain roughly a one-to-one value with the U.S. dollar through the use of smart contracts. In other words, Dai coin is a stablecoin. But whereas other stablecoins are run by centralized organizations that seek to keep their prices steady, DAI crypto is based on smart contracts and backed by other forms of crypto, by using collateralized debt.
Shiba Inu cryptocurrency (SHIB) is what’s known as a “meme coin,” or a cryptocurrency based on a meme. A meme coin is a cryptocurrency or crypto token based on a viral joke or cultural reference. Projects built around meme coins rely heavily on social media hype to attract new users/investors. Shiba Inu (SHIB) was inspired by Dogecoin (DOGE), the original meme coin created in 2014 that uses the image of a Shiba Inu dog, and which we discussed above.
SHIB intends to be an alternative to Dogecoin or a “Dogecoin killer.” Unlike DOGE, which has its own blockchain, SHIB runs on the Ethereum blockchain. One thing DOGE and SHIB both have in common, however, is that their supply is abundant. SHIB began with an initial circulating supply of one quadrillion coins.
As with any investment vehicle, Shiba Inu crypto has both advantages and disadvantages. It also has value for a couple of reasons:
• There is a limited supply of SHIB. The SHIB coin was launched in 2020 with a fixed 1 quadrillion supply — nearly 50% of which has already been burned or donated — which has kept the market price low (one SHIB coin is worth a fraction of a penny). The cap on the number of coins has also given the price somewhere to go, if demand should rise.
• SHIB comes with attractive rewards. Shiba Inu has a system that can provide investors with passive income via rewards from staking — locking up crypto holdings to get rewards or earn interest — or depositing funds in a liquidity pool. This reward system intends to offer users the incentive to expend different coins on the network.
12. TRON (TRX)
• TRX—Crypto Type: Token
• Market Cap (06/25/22): $6,004,598,717
TRON (TRX) is a decentralized blockchain-based operating system developed by the Tron Foundation and launched in 2017. Originally, TRX tokens were ERC-20-based tokens deployed on Ethereum, but a year later they moved to their own network. TRON is a blockchain-based operating system that aims to ensure this technology is suitable for daily use.
The TRON software supports smart contracts, various kinds of blockchain systems, and dApps. It uses a transaction model similar to Bitcoin, namely UTXO. Transactions take place in a public ledger, where users can track the history of operations. The data hosted on the TRON network is free with no central authority.
TRON aims to help content creators — who receive only a small part of income for their work, in the form of TRX tokens — and encourage them with more rewards. For example, TRON invites content consumers to reward content makers directly, without intermediaries like YouTube, Meta, or Apple. TRON also deploys decentralized games on the network, and players can encourage and reward creators with digital assets directly.
The platform was built to create a decentralized Internet and serves as a tool for developers to create dApps, acting as an alternative to Ethereum. Anyone can create dApps on the TRON network, offer content, and in return receive digital assets as compensation for their efforts. The ability to create content and share it openly without hesitation regarding transaction fees is an advantage of TRON.
Avalanche (AVAX) is a blockchain platform built for smart contracts, dApps, and subnets (customized blockchains). The network focuses on fast transactions, low fees, and efficient energy. AVAX, is Avalanche’s native token.
With its three-blockchain architecture and PoS consensus protocol, Avalanche can deliver high throughput, which will help the network grow without sacrificing its security or decentralization.
Avalanche is part of a group of smart contract platforms that compete with Ethereum, collectively referred to as “Ethereum killers.” As we note earlier, Ethereum is the second-largest crypto by market cap and was the first blockchain to enable smart contract functionality. Smart contracts are programmatic agreements that are trustless, i.e., they don’t require third-party authentication and can execute automatically when certain conditions are met.
The Ethereum network has been host to numerous complex apps for decentralized finance (DeFi), and non-fungible tokens (NFTs) also have been built on Ethereum. This has created network congestion as users compete to have their transactions included in the next block on the blockchain, which has resulted in higher gas fees. Because of this, crypto protocols have begun building on layer-2 solutions. Avalanche wants to work around this need and instead have a layer-1 solution that can handle all that’s needed for this kind of blockchain .
Avalanche use three different blockchains to achieve this, which allows the platform to perform at a scale suitable for the broader internet. Each of the three blockchains performs a specialized task in the Avalanche ecosystem, whereas on most other blockchains, a single chain handles all the work.
14. UNUS SED LEO (LEO)
• LEO—Crypto Type: Token
• Market Cap (06/25/22): $5,619,863,497
UNUS SED LEO is a utility token that’s used across the iFinex ecosystem, and IFinex is the parent company of Bitfinex.
iFinex launched LEO in May 2019 for a specific purpose. Unlike many other cryptocurrencies, LEO was not meant to exist forever. UNUS SED LEO was founded after Crypto Capital — a company that processed iFinex’s payments — had part of its funds seized by the government. Because it was not clear whether IFinex could recover these funds, it created LEO to help defray the financial shortfall.
LEO helps Bitfinex users save money on trading fees by offering them a discount based on how much LEO a customer has in their account.
Whereas some cryptocurrencies just launch on a single blockchain, LEO tokens were issued on two blockchains. While 64% of the original supply was on Ethereum, the remaining 36% were created on EOS ( a platform designed to allow developers to build dApps easily.
The project’s goal is relatively simple: to make it as straightforward as possible for programmers to embrace blockchain technology — and ensure that the network is easier to use than rivals.
Throughout the process of creating the token, iFinex acted with transparency, announcing that it would buy back the token from investors gradually until none were left circulating in the marketplace. iFinex also put monitoring procedures in place so the crypto community could see whether the LEO initiative was meeting its stated targets. This type of integrity is one quality that makes UNUS SED LEO a unique crypto.
15. Wrapped Bitcoin (WBTC)
• WBTC—Crypto Type: Token
• Market Cap (06/25/22): $5,692,540,738
A wrapped cryptocurrency is an ERC-20 token that has the exact value as the other asset it represents. The value can be pegged either through 1-to-1 backing with the underlying asset or via a smart contract that negotiates a stable value.
Wrapped Bitcoin is an ERC-20 token that represents one bitcoin and can be used in dApps. With WBTC, users can deploy bitcoin in the Ethereum ecosystem, whereas otherwise they would not be able to. Decentralized applications (dApps) can process wrapped token transactions faster than unwrapped versions because there’s no need to compute across different blockchains, which is difficult.
The only thing required to transact on Ethereum using wrapped tokens is a small gas (ETH) fee.
There are currently several types of wrapped cryptocurrencies, including a handful of stablecoins like Tether (USDT) and Coinbase’s United States Dollar Coin (USDC). Private cryptocurrency Zcash has a wrapped token, too. And other coins are coming out with wrapped versions, in an effort to stay relevant and usable during a period of rapid DeFi adoption.
Launched in January 2019, WBTC was designed to bring the liquidity of bitcoin to Ethereum. In the 18 months following its launch, users converted more than $800 million of Bitcoin into WBTC.
Litecoin (LTC) is a cryptocurrency created in 2011 as one of the first altcoins (alternatives to bitcoin). Though it’s built on bitcoin’s original source code and shares certain features with BTC, LTC was designed to improve upon BTC, especially in terms of transaction speed. Though Litecoin was initially a popular entry into the crypto category, it has gained and lost value over time, displaying a similar volatility to many cryptocurrencies (or even certain stocks and bonds).
Like many forms of crypto, Litecoin is a decentralized, peer-to-peer cryptocurrency; it was created from a fork in the Bitcoin blockchain, the transparent, digital public ledger used by most cryptocurrencies. Litecoin was designed to enable almost instant, near-zero cost payments that can be exchanged between people or institutions worldwide.
As with Bitcoin, Litecoin uses a PoW consensus system to verify transactions on the blockchain, but owing to certain modifications it’s considered a lighter, faster version of Bitcoin. The main difference between Litecoin and Bitcoin is that Litecoin uses a mining algorithm called scrypt, to enable faster transaction times.
Litecoin generates a new block to be mined every 2.5 minutes, which is about four times faster than Bitcoin’s 10 minutes. The Litecoin supply is also four times as great. While Bitcoin has a cap of 21 million coins, the Litecoin supply overall has a cap of 84 million.
Uniswap is the largest decentralized crypto exchange (DEX) running on the Ethereum blockchain. Its native governance token is the UNI. Uniswap is a protocol on the Ethereum blockchain for swapping all ERC-20 tokens. Unlike centralized exchanges, which are set up to charge transaction fees, Uniswap is designed more as a tool for the community to trade tokens without platform fees or middlemen.
Unlike well-established, centralized crypto exchanges (CEXs) like Binance or Coinbase, the Uniswap protocol uses smart contracts to facilitate trading of ERC-20 tokens, acting as an automated market maker (AMM). The AMM model, which powers most decentralized exchanges, does away with the traditional order book, which would contain all bid and ask (buy and sell) orders on an exchange. Rather than stating the current market price of an asset, an AMM conjures liquidity pools through smart contracts. The pools then execute trades according to preset algorithms.
Uniswap was one of the first DEXs to create an automated liquidity protocol to facilitate trades. Unlike well-established, centralized crypto exchanges (CEX) like Binance or Coinbase, the Uniswap protocol uses smart contracts to facilitate trading of ERC-20 tokens, acting as an AMM. Uniswap was one of the first DEXs to create an automated liquidity protocol to facilitate trades.
The Takeaway
On October 31 in 2009, an individual or group of individuals using the pseudonym Satoshi Nakamoto launched the Bitcoin project, described a year earlier in the iconic whitepaper, Bitcoin: A Peer-to-Peer Electronic Cash System. . In this way, cryptocurrency was born.
Could the author of that paper have known then that the public release of Bitcoin would set the world on a path toward economic and social change the likes of which it could not have imagined? Possibly not. Yet, today, there are thousands of different cryptocurrencies for investors to learn about.
This guide to 20 different types of cryptocurrency offers a grounding in today’s largest cryptocurrencies, including how and why they differ from each other. We hope it would help you decide how best to invest in crypto, according to your own investment style and tolerance for risk.
FAQ
Can you invest in all types of crypto?
Yes. It’s possible to invest in all the types of crypto mentioned here, and many more. However, not all crypto exchanges offer all the different cryptos in existence. So,— if you’re looking for a specific coin, it’s best to see which exchanges carry it. It’s also wise to check the fee schedules of the exchanges you’re interested in, as they may be different across exchanges.
Is crypto regulated by the Securities and Exchange Commission (SEC)?
Not entirely; but the SEC is working on it: In May 2022, SEC Chair Gary Gensler announced plans to expand the SEC’s Crypto Assets and Cyber Unit — which has existed as an arm of the SEC Division of Enforcement since 2017 — by adding 20 new dedicated positions. At the same meeting, Gensler also said that the SEC plans to register and regulate crypto exchanges.
The expanded Crypto Assets and Cyber Unit will continue to leverage the agency’s expertise to ensure that investors are protected in the crypto markets.
A number of cryptos are considered by the SEC to be securities, so the SEC will continue to investigate securities law violations related to crypto asset offerings. In its investigations, and rule making, the SEC also will focus on crypto asset exchanges, crypto asset lending and staking products; decentralized finance (DeFi) platforms; non-fungible tokens (NFTs); and stablecoins.
When did crypto become popular?
In its now 13-year-old history, there are some milestones that, in hindsight, may be said to correlate with cryptocurrency’s and Bitcoin’s surge in popularity. These include, but are not limited to, the year 2011, when the first rivals to Bitcoin’s supremacy (the altcoins) came on the scene. Another marker could be around 2016, when ordinary folks began to wake up to the power of blockchain technology and the Ethereum coin, ETH, became wildly popular. Following upon ETH’s popularity, was a frenzy of initial coin offerings (ICOs), which finally reached its peak in early 2018, at 1,253 ICOs.
Another pivotal period was in 2017, when Bitcoin reached a priced of $10,000 and continued to grow. This growth resulted in part from a gradual increase in the number of places where Bitcoin could be spent, as well as traded.
Not insignificantly, crypto’s popularity spurt in 2017 also coincided with the first commercial and investment banks’ displaying interest in the digital assets sector.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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Investing is a powerful tool that allows you to put your money to work to help you reach future financial goals. But if you’re new to investing, you may be asking yourself what strategies should you pursue?
Here’s a guide to help you get started.
5 Popular Investment Strategies for Beginners
1. Asset Allocation
Once you’ve opened an investment account and you begin to build your portfolio, asset allocation is one of the most important strategies to consider to help you balance risk and return. A typical portfolio might divide its assets among three main asset classes: stocks, bonds and cash. Each asset class has its own risk and return profile, behaving a little bit differently under different market circumstances.
For example, stocks tend to offer the highest gains, but they are also the most volatile, presenting the most potential for losses. Bonds are generally considered to be less risky than stocks, while cash is the most stable. Cash investments in your savings account are insured by the federal government.
The proportion of each asset class you hold will depend on your goals, time horizon and risk tolerance. Your goal tells you how much you need to save. Your time horizon is the length of time you have before reaching your goals. And your risk tolerance is how willing you are to accept losses in the short-term in exchange for potentially greater long-term gains.
Your asset allocation can shift over time. For example, someone in their 30s saving for retirement has a long time horizon and may have a higher risk tolerance. As a result their portfolio may contain mostly stocks. As that person ages and nears retirement, their portfolio may shift to contain more bonds and cash, which are less risk and less likely to lose value in the short-term.
2. Diversification
Another way to manage risk in your portfolio is through diversification, building a portfolio with a broad mix of investments across assets, helping you avoid putting all your eggs in one basket.
Here’s how it works: Imagine you had a portfolio consisting of stock from one company. If that stock does poorly your entire portfolio suffers.
Now imagine a portfolio consisting of many stocks, from companies of all sizes, sectors and parts of the globe. Not only that, it also holds other investments, including bonds. Now, if one stock suffers, it will have a much smaller effect on your overall portfolio, spreading out the risk of holding any one investment.
3. Rebalancing
Your portfolio can change over time, shifting your assets allocation and diversification. For example, if there is a bull market and stocks outperform, you may discover that you now hold a greater portion of your portfolio in stocks than you had intended.
At this point, you may need to rebalance your portfolio to bring it back in line with your goals, time horizon and risk tolerance. In the example above, you may decide to sell some stock or devote new investment funds to buying more bonds.
4. Buy and Hold Strategy for Investing
Market fluctuations are a natural part of the market cycle. However, investors may get nervous and be tempted to sell when prices drop. However, when they do, investors lock in their losses and often miss out on subsequent market rebounds.
Investors practicing buy-and-hold strategies tend to buy investments and hang on to them over the long term, regardless of short-term movements in the market. Doing so can help curb the tendency to panic sell, and it can also help minimize fees associated with trading, which can boost overall portfolio returns.
When it comes to these taxes, whether a holding is a long-term investment vs. short-term one can make a big difference in terms of how much you pay in taxes.
If you profit from an investment after owning it for at least a year, it’s a long-term capital gain. Less than that is short-term. Capital gains tax rates can change, but generally, longer-term investments are taxed at a lower rate than short-term ones.
5. Dollar-Cost Averaging
Dollar-cost averaging is a strategy that helps individuals invest on a regular basis by making fixed investments on a regular schedule regardless of price.
For example, say an investor wants to invest $1,000 every quarter in an ETF that tracks the S&P 500. Each quarter, the price of that fund will vary—Sometimes it will be up, sometimes it will be down. The amount of money the individual invests remains the same, so they are buying fewer shares when prices are high, and more shares when prices are low.
This strategy can help individuals access a lower average share price, and it can also help them avoid emotional investing.
The Takeaway
Investing is an ongoing and dynamic process. Your life, goals and financial needs will all change as your circumstances do. For example, may you get a raise at work, get married and have a child, or you decide to retire early. Factors like these will change how much money you need to save and how you invest. Monitor your portfolio and make adjustments as needed.
Ready to start investing? Visit SoFi Invest, which allows you to invest however you feel most comfortable, whether through a hands-on approach with active investing or by letting automated investing do the work for you. There are no SoFi management or commission fees, and you can speak to an advisor to help get started.
Learn more about SoFi Invest today.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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When it comes to investing, most people start with What. What should I invest in? What should my portfolio strategy be? What stock should I invest in?
But there’s actually a more important place to start: Why. Why do you want to invest in the first place? Why are you building a portfolio?
Selecting an investment strategy largely depends on your financial goals. This is sometimes an overlooked first step in building a sound investment strategy.
You can’t plan the right portfolio unless you know what you want to save for, how much you want to save, and when you’d like to use that money.
You might think of building an investment strategy as a top-down approach. Start with the big picture idea of what you want to accomplish. Then, hone in on the strategy that makes the most sense given those goals. Should you even be in stocks, or in bonds? Or should your money be held in cash? Or, should you do something else entirely?
Setting Your Financial Goals
First, you may want to consider these two recommended goals: Creating an emergency fund and saving for retirement. These are sometimes referred to as “bookend goals, because they are your primary short-term and primary long-term financial goals. From there, how you prioritize your other goals is entirely up to you.
Creating an Emergency Fund
Your emergency fund is a lump sum that you can easily access should an emergency arise—for example, if you get laid off or face unexpected health costs. It is common knowledge that this fund be three to six times your monthly spend, depending on how risk-averse and well-insured you are.
Consider Asking Yourself:
• How much do I spend each month?
• How much of that is necessary spending, and how much is discretionary?
• How many months’ expenses would I like to have saved?
• Do I have dependents or others that live off my income?
• What’s my target emergency fund?
Creating a Retirement Fund
Retirement may be your largest long-term financial goal, and even if it feels very far away, it’s helpful to start saving early. Why? The earlier you start saving, the more time your money has to work for you.
Consider Asking Yourself:
• At what age do you want to retire? For those born after 1960, full Social Security full Social Security retirement age is 67 .
• How much money do you need to live on each year (in today’s dollars)?
• How long do you expect to live? Statistically, those born in the 1980s have a life expectancy of about 79 years, but to be safe (and optimistic), you may want to plan for (much) longer.
• What do you currently have saved for this goal? You may want to use a retirement calculator to see if you are on track.
Your In-Between Goals: Houses, Families, Businesses, and More
How you prioritize everything in-between your emergency fund and retirement depends entirely on you. For example, do you want to buy a home? Start a family? Launch a business? Go on an epic month-long vacation? Many of the above?
Any goal you can think of is on the table. You may want to be specific—exactly how much money you need to achieve each goal, and by when. Why? If you’re specific, you’ll have a much higher likelihood of reaching that target, when the time comes to use that money, you’ll have already given yourself permission and can enjoy it.
Consider Asking Yourself:
• What is your goal?
• When do you need the money?
• How much do you need?
• How much can you save each month?
• What may be some obstacles that could come up?
Starting Your Investment Strategy
As you’ve seen in the exercises above, each of your goals has a specific time horizon. This leads to an underlying investment strategy: Generally speaking, the longer the time horizon, the more risk you can afford to take, because you can weather market volatility.
When making a decision about how to build a portfolio, you may want to keep in mind that risk and reward are two sides of the same coin. You cannot have one without the other.
There is no such thing as an investment that is high reward with no risk. (If someone promises such an arrangement to you, you may want to run for the hills—it’s probably a scam.)
Oftentimes, risk comes in the form of volatility, which is how much the price of an investment type fluctuates. Although these fluctuations are often temporary, it can take months or even years for returns to even back out to their historical averages.
Short Term (Less Than Three Years)
For goals like: Setting up an emergency fund, travel, buying a new car.
A good rule of thumb is to keep any money you need within the next three years “liquid,” or available to access as soon as you need it. For example, the whole point of having emergency cash is to have access to that money without worry.
Additionally, it is unlikely that you will want to subject money designated for the short term to the volatility of investments like the stock market. The biggest risk you take with short-term money is losing any of it at all, so you’ll probably want to keep it in cash.
If you have a higher risk tolerance, you can consider investing some money for short-term goals in a conservative portfolio that will pay a higher interest than a savings account, but that still has a low risk of losing money. If you go this route, you may want to remain flexible about when and how you tap into those investments.
Your cash can be held in a savings account of your choosing. You may elect to keep this cash in an interest-bearing savings account where you can earn interest on your cash savings. You may even find it helpful to open multiple savings accounts, giving them distinct names, in order to keep track of your various goals.
Medium Term (Five to 10 Years)
For goals like: Home purchase, starting a family.
With a time horizon of five to 10 years, you may be able to afford taking some risk with your money and give it a greater chance to grow. For these types of goals, you could potentially choose a moderate or moderately conservative portfolio.
Depending on your comfort level, this portfolio may hold a combination of cash, other fixed-income investments, like bonds, and some stocks.
More than likely, you’ll hold these investments in an investment account, which is sometimes also called a brokerage account.
For goals where you’re investing money for the mid-term, it generally does not make sense to use a retirement account like a 401(k) or Traditional IRA. You could be penalized for pulling the money out before retirement.
Medium to Long Term (10-20 Years)
For goals like: Child’s college savings, second home
With a time horizon of 10-20 years, you may be able to afford taking more risk with your money in order to take advantage of the power of compounding.
Depending on your comfort level, you may want to consider a moderate to moderately aggressive portfolio. Generally, the longer your investing timeline, the more risk you can take. This may mean building in a higher allocation to stocks and bonds.
Investments for goals with a pre-retirement timeline should be held in an investment or brokerage account. For a child’s college, consider using a 529 Plan which provides some tax benefits to those that are saving for the purpose of higher education.
Long Term (20+ Years)
For goals like: Retirement, financial independence
For long-term goals, time may be on your side. Having several decades or more gives a portfolio time to weather the ups and downs of the market and economic cycles. This allows an investor to take on more risk with the hope of more reward.
With this in mind, you may want to focus on aggressive growth while you are young, and then shift to a more conservative investment allocation over time. Depending on your comfort with the stock market, this may mean allocating a majority of your portfolio to the stock market or other high-risk, high-reward investments.
To save for retirement, you may want to consider investing in a 401(k) plan, a online IRA, or some other retirement-specific account. Retirement accounts have benefits when it comes to taxes, such as deferment on paying taxes until you withdraw from your 401k, or the ability to withdraw contributions from your Roth IRA early without penalties.
What’s Next?
Once you’ve outlined your goals, you’ve completed the first step of investing.
A good second step? Learning more about the investment options that are available to you. This will aid you in building a portfolio that will help you achieve your goals.
A good place to start is learning the different asset classes and their respective risk and reward profiles. If you are going to be invested in something, it’s helpful to know what to expect. Proper expectations may make you a more successful long-term investor.
Another option is to set up a complimentary appointment with a SoFi financial planner, who can help you define and quantify your goals and discuss the potential investment strategies to reach them. With SoFi Invest, this service is complimentary.
Depending on how involved you would like to be, SoFi has options for building your own investing portfolio or having an automated portfolio built for you, with your goals in mind. There are no associated costs or fees with utilizing either investing option.
Investing isn’t just for the wealthy; it’s for anyone who wants to achieve financial goals. There are low-cost, simple, and effective investing options that are accessible to investors of all sizes. You could get started today with a few clicks.
But before you do, you may want to spend some time thinking about what you’re investing for. Naming your goals will help guide you towards an appropriate investment portfolio. As a bonus, thinking deeply about goals may just help you to find the motivation to stick with them.
Interested in investing, now that you know where to start? Check out SoFi Invest® today.
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SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
