Forget a cash ISA and Bitcoin! I think this could be a better way to get rich

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One of the challenges of investing capital is obtaining the right risk/reward ratio given an individual’s personal circumstances. Taking too much risk can increase potential returns, but the possibility of losses also rises. In contrast, not taking enough risk can lead to sub-standard returns which fail to keep pace with inflation and reduce an individual’s spending power over time.

With that in mind, the appeal of Bitcoin and a cash ISA seem to be somewhat limited. The virtual currency appears to offer an exceptionally high level of risk after its 80%+ decline since the latter part of 2017. Meanwhile, a cash ISA’s returns seem to be too low to merit investment over a long-term period. As such, investing in the stock market could be a means of obtaining a more balanced and favourable risk/reward ratio for the long run.

Bitcoin

As mentioned, Bitcoin appears to be a very high-risk investment. After losing over 80% of its value in less than 18 months, the volatility of the asset is clear. Looking ahead, it’s difficult to predict in which direction it may move, since it lacks fundamentals. It’s therefore difficult to determine whether it now offers good value for money, or if its price is still exceptionally high given its limited real-world usage. Investors looking to buy Bitcoin now may argue that the return potential on offer is high. But its risks appear to be significant, even after its sharp decline.

Cash ISA

A cash ISA is in some respects the polar opposite of Bitcoin. Although an investor will receive the original amount invested, plus interest income, thereby making it relatively low risk, the returns available are likely to be exceptionally low. For example, at the present time a cash ISA is unlikely to yield much more than 1.5% per annum. At a time when inflation is around 2.1%, this means that the spending power of every £1 invested in a cash ISA is likely to fall over time. For individuals seeking to increase their net worth, this is unlikely to be a worthwhile means of doing so.

Stock market

The stock market can offer a more balanced risk/reward ratio than Bitcoin or a cash ISA. Moreover, it’s possible to create a portfolio which consists of a variety of shares that produce a risk/reward ratio tailored to the personal circumstances of the individual. For example, it’s possible to stick to large-cap shares which offer high yields and defensive business models in order to reduce risk. Likewise, an investor may wish to focus on smaller shares in more volatile industries in order to try and maximise returns.

Clearly, there’s a risk of loss from investing in shares. But, unlike Bitcoin, it’s possible to research a company’s fundamentals in order to lessen the prospect of this taking place. And with the returns of shares generally being significantly higher than a cash ISA, it may be a more worthwhile means of increasing an individual’s net worth over the long run.

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