We see many people jump into cryptocurrency investing without stopping to think about their financial situation, goals or how they intend to reach these goals. Because cryptocurrencies are so accessible, people often overlook the immediate implications of buying such an asset without a plan. Failing to develop a plan can have perilous consequences for an investors portfolio.
For example, Gill hears about a token from an influencer and sees it increase in value by over 200% over 3 hours.
Gill has no investment plan. So, rather than determining how much money he’s willing or able to invest, assessing the risk or performing any due diligence (i.e. researching the token’s fundamentals or performing basic technical analysis), Gill develops an irrational fear of missing out (FOMO) and quickly invests an inappropriate amount into the token in the hope he’ll ‘score big’.
Over the next few hours, the token’s price increases another 50%, but as Gill doesn’t have a plan, it means he also doesn’t have an exit strategy and thus takes no profits.
In less than an hour, the token’s price plummets by 60%. Gill is panicked. Fearful of losing a significant amount of money, he quickly sells his position for a significant loss.
Gill invested more than he should have in context to his financial situation. This created significant and unnecessary financial stress, leading him to make emotional and irrational investment decisions.
Had Gill devoted the time to creating a plan and sticking with it, he may have either:
While creating a realistic investment plan is an effective way to improve the likelihood of reaching your financial goals, a plan is only as good as your ability to stick to it.
You should constantly be reviewing your investment decisions through the framework of your investment plan and creating methods to hold yourself accountable to your plan. Some ways to do this:
Failing to remain accountable to your investment plan can harm your ability to achieve your financial goals.