We’ve all been there. Sat around the table with friends when one of them pipes up with a comment about how a friend of a friend made untold riches by investing in Bitcoin years ago. Indeed, this story could be replicated with each of the three asset classes I mention in my title.
An undervalued company that you bought could have experienced a turnaround, doubling the share price over a period. A bond that you bought well below par value could have returned substantial coupons along with capital appreciation.
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So when trying to look objectively, which asset class of the three is most likely to make me rich and let me retire early?
It is hard to decide which asset class Bitcoin fits into! Some say it is a commodity, and classify it with gold. Others says it is a currency. Still others say it falls under ‘alternatives‘. Whatever you think, it has the hallmarks of being very volatile, while not really having much tangible value. It is also largely an unregulated asset, although the authorities are trying to change that.
Overall, while some have made riches during the boom period (and indeed I participated on this bandwagon), I would not point it out as the most likely way for me to currently make a fortune. This is due to some of the traits mentioned above, which increase the risk associated with investing in it. Further, when looking at the charts (known as technical analysis), it does not appear to be a coiled spring waiting to take a sharp move higher.
While you may hear fewer stories of making overnight riches from investing in stocks, it does and can happen. For example, take a look at some of the top performing stocks across the FTSE 250 from last quarter.
The London Stock Exchange Group returned 33.2% in those three months alone! Past performance does not indicate future returns, but if you extrapolate that three-month performance out over a year, you can see how there is the potential for large profits.
I favour investing in stocks due to the lower risk shown when comparing it to Bitcoin. While this reduces potential returns, I think it is a much safer and appropriate risk trade-off when aiming to retire early.
Arguably the most traditional form of investment, bonds can be said to be the lowest risk of the three asset classes mentioned. The risk you take as an investor is that the company defaults on their debt obligations. This is unlikely if you buy the bond from a reputable firm.
For example, an HSBC bond which redeems in five years has appreciated in value by 7.8% over the past year. Add onto this a US dollar coupon of 4.25%, and you can see the appeal.
I definitely like buying bonds for income and a low risk investment, but if I am trying to make significant gains, bonds are unlikely to be the right asset class for me. Overall, I favour stocks.