Cash management and investing – Building a home on a steady base

Have you ever thought about building a home of your own? Or acquainted yourself with building a home? Or perhaps you’ve already built a home?

Then you know building a home requires:

  1. A good foundation
  2. A building plan and skill
  3. That the home suits its inhabitant

A good foundation

When building a house the most important foundation is a good ground. Before one can build anything that lasts for decades there must be a steady base for it. Everyone probably understands that a house built on an unsteady base is like building the leaning tower of Pisa. The marble tower of Pisa was built on swampy ground, so the heavy tower started tilting already during its construction. Thus construction was interrupted for a whole century, after which special engineering skill was required to even finish the tower.

If the groundwork of a building is like the Pisa tower, the probability of such a building collapsing grows each year. In order to avoid Pisa’s fate, it’s worth fixing the foundation right from the beginning. Next we will take a look at how these construction tips can also be applied to investing.

A good foundation is important both in housebuilding and investing.

Cash management – a base for good investing

In both housebuilding and investing cash management creates a good ground for upcoming profits. Cash management in turn refers to rules that ensure the risks of investing remain as low as possible. For instance a rule of never investing more than 10% of your portfolio in one target is a rule which decreases the portfolio’s dependence on one target. Another rule could be to never invest in something you don’t understand, meaning that unfamiliar targets should be reconsidered at least twice before investing in them.

When investing in bitcoin it’s good to first acquaint yourself with what bitcoin is and how it behaves on the markets in different situations. For instance, bitcoin’s foundation can be explored through the achievements of bitcoin developers, so called proof-of-work and current development targets. Thus one can ensure that bitcoin as a product and service is being developed in professional hands also in the future. This in turn means that bitcoin’s value will at least not drop to zero, since there is constant development work improving the system. Following bitcoin’s developer team can be one way to ascertain if bitcoin’s foundations as an investment are steady.

Cash management refers to that very foundation and base on which the investment is built. If the immediate risks are high, there’s no reason to think investing on a long timescale would have low risk. Low risk does not mean that profit probability grows, but good risk management can at least decrease the risk of greater losses. This also enables gaining profits in the future, since resources will not suddenly run out. And when cash management is in good order, one can build something more lasting, which we address in the next chapter.

The skill of building a house

Once the foundation of the house is all in order, we can commence wit the building itself.  At this stage the building plan forms the foundation for the whole construction. A good building plan takes into account the construction materials, their compatibility, necessary knowledge, legislation, environmental factors and of course different stages and blueprints. It matters whether the house is built of timber, brick or elements, and every construction form requires its own professional to realize it. Also construction-related legislation with all its possible inspections should be accounted for already in the plan, so that bigger mistakes can be avoided later.

When a functional plan for building a house has been made, the ensuing construction can be seen as professional work. Building a house is not a game of chance, since building is consistent, considered and well-planned. A professional builder knows what one does in different stages and how to properly erect a house. But how can this planning be seen in investing?

Investing is planned action

Investing is also about planned action, which can be compared to professional business. In this case it’s no longer about coin-tossing but a consistent plan and way of operating in different market situations. This orderliness can be seen as placing profit targets and counting their probability mathematically. If one adheres to a decided plan one can for instance do the following:

If you think bitcoin’s development work can constantly improve the technology for bitcoin users, then the foundation for bitcoin’s price development is at least assumably good. Thus an investor can regard bitcoin’s price falling 70% from its previous highs a good opportunity to buy more, since the probability of technology-backed price rise in the future is also good. Investors can also use other counting methods to motivate why upcoming profis on the markets would be likely.

Without taking a stance on how investors want to define bitcoin’s value, it’s nonetheless good to have some kind of measurement system for it. Once you have a measurement system matching your own investment strategy, you can make a plan for what kind of profit is possible to achieve and how much time it requires. Predicting the future is easier if you have a ready plan for what to do in different situations. Ultimately we only have left the finetuning of the plan, which we address in the next chapter.

A good plan and adhering to it creates a base for successful investing.

Making a house into a home

Once the foundation and house has been built, it still needs to be made into a home. A house is only a building, while a home is a place to live in. For this reason building a home requires finetuning the house to suit oneself, such as deciding a nice color with which to paint it. This is usually worth doing already in the planning stage, but sometimes practice can cause changes to the original plans. Maybe local regulations restrict certain paints or colors, or maybe the colors look worse than in the plans, causing necessary changes. Whatever the case, the road from building to house always requires some finetuning.

Finetuning a suitable investment plan

If a house is made into a home by finetuning the original plan, similarly one can finetune an investment plan to be more suitable for oneself. There are many different ways to invest and act, but only in practice can these theories be tested.

If one for instance creates an investment plan with 30% of one’s portfolio invested in bitcoin this year, it doesn’t mean that bitcoin’s share of one’s portfolio in the future would remain at 30%. Bitcoin’s price like all other property classes may fluctuate, so it’s possible that bitcoin’s share of one’s portfolio in the future would even be 80% depending on the market situation. In this case some other investment target may have decreased in value while bitcoin has risen. This means that the risks of one’s investment portfolio have grown.

Risk in this context refers to dependence of only one investment, since such a situation makes the portfolio’s profits mainly dependent on a single target. Such a dependence is not wrong per se, but it should be considered especially with taxation and larger bitcoin purchases in mind.  Many investors have been surprised especially by tax policies during the past years, forcing bitcoin investors to finetune their investment plan to correspond to the effects of taxation.

Similarly bitcoin’s short-term price fluctuations can cause such great excitement and horror that investors must re-evaluate their stress management skills on the crypto markets. It takes practice to realize one’s own stress management level, and by then emotion-based mistakes may have already occurred. These mistakes in turn can cause losses and lead to an even worse emotional spiral. Managing your own feelings is particularly important, since this ensures more rational decisions. Next we will conclude with three main points of this article:

Cash management, investing and finetuning

Investing can roughly be divided into three parts, which in order of importance are:

  1. Cash management
  2. Investment plan and skills
  3. Finetuning your investment plan to suit your needs

Just like with houses, also investments should be built on a steady base to avoid the Pisa tower’s fate. This cash management forms a solid ground which can support a realistic investment plan. The investment plan in turn can be updated with increased experience by finetuning your strategy and improving profit probabilities. Nothing is certain, but a good plan has the seed for a better future – and that is what investors want.

This article does not present any investment recommendations nor should it be interpreted as such. Gaining profits on the markets often requires deep-rooted knowledge and several years of experience.

Hopefully these tips were helpful in pursuing better investments!

The writer is a board member of cryptocurrency organization Konsensus Ry and has years of experience in different investment fields, including cryptocurrencies.

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Writer Henri Väkeväinen