Get-rich-quick schemes have been around for centuries. The idea that it is possible to generate high returns in a short space of time will always have appeal for a significant number of people. And when those returns are on offer in a new industry which could experience high growth, they arguably become even more alluring.
For some investors, Bitcoin and various other virtual currencies have been seen as a potential means to make big money fast. They have become increasingly popular with investors who are seeking to utilise their exceptionally high volatility to their advantage. And with the blockchain technology on which Bitcoin is built potentially having numerous other applications, it is easy to see why cryptocurrencies have been seen as a means of generating high returns in a relatively short space of time.
The reality, though, is that risk and return are not mutually exclusive. Therefore, while the returns from Bitcoin may potentially be high, the risks are also likely to be elevated. As such, it may be worth an investor adopting a ‘slow and steady’ approach to building their wealth, rather than taking risks on assets which may not be fully understood by some individuals who invest in them.
Instead of focusing on trying to build wealth quickly, doing so over a long timescale via the stock market could be a better idea. Certainly, it may lack the excitement of Bitcoin, but it may be a more reliable and, ultimately, successful idea.
UK shares, for example, have a long history of generating high returns. In fact, if an investor buys a range of FTSE 100 or FTSE 250 shares and is prepared to hold them for the long run, they can expect to generate high single-digit total returns each year. When dividends are reinvested and annual returns are compounded, a portfolio can rise to surprisingly high levels.
For example, an investor buying £250 of shares in the FTSE 250 each month could end up with a nest egg of over £1m after 40 years. This assumes an annual total return of 9%, which has been achieved by the index over the last 20 years.
With the stock market having a successful track record of growth, investors are likely to have confidence in the potential for their portfolio over the long run. Therefore, even if it experiences a bear market or falls in value for whatever reason, they may see it as a buying opportunity. For example, they may decide that the fundamentals of a company mean that it merits a higher valuation than that presently determined by the stock market.
In contrast, it is difficult to know at what price Bitcoin represents a buying opportunity. A stock that has fallen may then trade on a low P/E ratio, or have a high dividend yield, for example. But with the virtual currency having no fundamentals, its growth prospects appear to be down to sentiment. And while this could lead to high returns, there is a risk of great losses too. Therefore, while perhaps less exciting, following the tried-and-tested path of buying shares could be a better idea when it comes to generating wealth.
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