Diversification is a crucial part of investing. It helps to reduce risk and may provide a more stable path to growth for an investor. As such, the idea of investing in a wide range of assets, including Bitcoin and buy-to-let, may be tempting. After the former’s fall and the apparent unpopularity of the latter, some investors may feel that they offer appealing risk/reward ratios. However, investing in shares through a stocks and shares ISA could prove to be a better move, in my opinion.
Clearly, Bitcoin and buy-to-let are very different assets in terms of their level of risk and volatility. Bitcoin, for example, has fallen in value by around 80% in just over a year, lacking fundamentals or real-world use in order to determine its intrinsic value. Buy-to-let, meanwhile, has a long track record of capital growth, offering a degree of stability to investors over a sustained time period.
The two assets, though, both face significant risks and, therefore, appear to be unappealing. Bitcoin may suffer from weak investor sentiment, being viewed as a volatile and risky asset by many investors. Since risk aversion among investors is becoming heightened at the present time, it may mean that demand for the virtual currency remains weak. Since it also appears to lack real-world usage, as a result of its limited size and lack of infrastructure, it may also fail to recover over an extended time period.
Buy-to-let faces the threat of rising interest rates. UK monetary policy has been loose for a decade, but interest rates are forecast to continue to rise over the next few years. This could squeeze the cash flow and profitability of landlords at a time when rental growth may disappoint as consumers remain highly price conscious as the Brexit process moves ahead. If interest rates do move higher, the end result could be lower demand for property, and a lack of capital growth for property investors.
Stocks and shares ISA
In contrast, investing in shares through a stocks and shares ISA could be a sound move. Certainly, risks such as a Chinese slowdown, the threat of a trade war, and Brexit may hold back the performance of a range of stocks in the near term. But with the world economy expected to grow at a brisk pace over the medium term, a number of industries and companies could benefit from a tailwind in the coming years. And since the FTSE 100 and FTSE 250 have fallen heavily in recent months, they may now offer wide margins of safety.
Clearly, shares carry risks. But it may be possible to mitigate them through diversifying by country, industry, stock type, and a number of other factors. In doing so, an investor may be able to generate high returns with relatively low risk, while outperforming Bitcoin and buy-to-let in the process.
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