An earlier article looked at the importance of diversification in your portfolio. Below you'll find a rundown of the different major asset classes, and what sort of returns you might expect to gain from them in the medium to long term. The proportions of each of these you allocate to your portfolio will depend on your risk tolerance, timescale, and financial goals.Cash
When "saving" for the future, the first asset that probably comes to mind is cash. While you should have some cash to hand to get you through any downturns in the market when your portfolio isn't generating a return, holding a lot of cash is a bad idea. Returns on cash are awful. Most accounts will pay less than 0.5% per year in the current climate. Worse, inflation will eat away at your reserve, meaning you're actually losing money over time. Stocks
Stocks are the classic traditional long-term investment. Over time, major stock markets have always risen in value, though there can be periods of time when the value of that component of your portfolio will fall.
Take the S&P500, the index of the 500 largest companies in America. According to Warren Buffett's fund, Berkshire Hathaway
, between 1965 and 2019 the S&P returned an average of 10% per year
(including reinvesting dividends). In any individual
year, though, the market could rise or fall. Past performance is no indicator of the future, but there's a reason that investors like Buffett take a long-term buy-and-hold approach to stocks. Bonds
Bonds are income-generating securities that governments and corporations use to raise money. When you buy a bond, you are effectively lending money to a government or company and being paid interest on that over time. The bond market is generally ignored by regular retail investors, as it's harder to understand and access. Generally only expert or institutional investors buy bonds. For reference, though, a bond index (investing in a wide range of companies, just like the S&P is a wide range of companies) will typically yield less than stocks, perhaps around 5-6% per year, but is more reliable – that is, high-quality bonds provide safer income
Crypto is a high-risk, high-return asset. Here we'll only focus on bitcoin, the first, largest and most successful cryptocurrency. That's because other cryptos – collectively known as "altcoins" – can be extremely volatile and very variable in quality. Smaller and less well-established altcoins can rapidly collapse in value entirely and their prospects and legitimacy are very hard to evaluate. It's like comparing a tech giant like Apple to a new startup.
Bitcoin is volatile too, but has consistently posted strong returns over relatively short periods of time. We'll ignore the very early years when there wasn't a good market for bitcoin. Bitcoin first reached $1 in February 2011. Ten years later in February 2021 it was worth $50,000, meaning it returned an average of almost 300% per year, or tripling in price every year.
Buying five years ago, at the start of 2016 for around $400, would have yielded around 165% per year by early 2021. Even buying at the worst possible point in 2017, at the peak of almost $20,000 in December, you would still have doubled your investment in three years – a far cry from the stock market's average of 10%.
Bitcoin will likely grow at a lower average rate over the coming years after these staggering early returns, but it's still not an asset to ignore – especially since you can earn crypto or generate interest on bitcoin holdings. DeFi
Decentralized Finance (DeFi) refers to crypto apps geared towards providing financial services and producing yield (cash returns) for users. It's a new sector and a new application for blockchain technology, but it's growing fast. By cutting out the many middlemen in the traditional financial sector, all of whom charge fees, DeFi provides incredibly efficient financial services like borrowing and lending.
Returns can be as high as 20% per year with safe DeFi opportunities. Platforms like Coinchange
make it easy to access DeFi products and earn crypto, meaning you don't have to worry about setting up your own crypto wallet, managing private keys, ensuring your funds are secure, and constantly researching the market for the best yield. It's all done for you, on a regulated, insured, user-friendly and professionally-run exchange.