According to research from The Ascent, conducted in May of 2021, more than 50 million Americans intended to buy cryptocurrency over the course of the upcoming year. Americans are drawn to crypto for a number of reasons, including their belief in its long-term potential, as well as the possibility of a quick profit.
But I won't be one of those Americans. In fact, rather than buying any cryptocurrencies, I'll be putting my money into one of Warren Buffett's favorite investments — and one the Oracle of Omaha suggests is the right choice for the majority of investors. It's an S&P 500 index fund.
There are three big reasons why I'd rather invest in this Buffett pick any day of the week rather than any crypto.
1. The S&P 500 has a long track record
Predicting the S&P 500's future performance is easy because there's decades of data to go on. In fact, since 1957, the financial index has produced an average annual return of 10% with dividends reinvested.
Although this doesn't mean that the S&P 500 has produced these returns every year, a look at the index's entire history shows that if you invested in it at any time and left your money alone for at least 20 years, you'd have turned a profit no matter how poorly you timed your purchase. With such a long and successful track record, I can feel pretty confident I'll be able to earn similar returns with my own investment if I leave it alone.
Cryptocurrency, on the other hand, has been around for a much shorter time. Most people consider Bitcoin to be the first virtual currency, and it was founded in 2009. So we're talking about just over a decade of performance history. Since I'm a long-term investor and I prefer to follow Buffett's advice and avoid investing in anything I wouldn't be happy to hold for at least a decade, an investment that's so unproven makes me nervous.
2. There's very limited risk involved with investing in the S&P 500
The S&P 500 fund aims to track the performance of 500 of the largest U.S. companies. Investing in it means putting a small amount of money into tons of businesses that are household names. As long as the American economy and all of its largest businesses don't suddenly undergo a dramatic collapse that it's impossible to recover from, it would be almost impossible to suffer large long-term losses with an S&P 500 investment.
Cryptocurrencies, on the other hand, present a much greater risk. Many have little real-world utility since they can't generally be used to pay for goods or services with most merchants. Prices often become divorced from the underlying value of the currencies, as people invest because of social media hype or celebrity tweets. And it's entirely possible that some coins could end up with their value plummeting to $0 if investors lose interest in them.
I'd rather not take the chance of losing most or all of my investment in search of potentially higher returns that crypto can provide, especially since I can achieve my investing goals by earning the 10% average annual returns the S&P 500 has consistently produced over time. While I might possibly be able achieve my goals more quickly if crypto paid off with higher returns, that's far less certain, and I'd rather have more confidence that my investments will pay off.
3. The S&P 500 isn't very volatile
The S&P 500 has definitely had some up years and some down years. But because your money is spread across 500 very large companies, the price of an S&P index fund doesn't tend to swing too much too quickly because the shares of so many companies would have to rise or fall dramatically at one time in order for that to happen. And when the index does see bigger ups and downs, there's almost always a very clear reason why.
By contrast, a quick look at the history of different cryptocurrencies shows that prices have generally been much more volatile. That means a poorly timed investment could have led to much greater losses. I know that losses aren't permanent until you sell, but I don't want to see my investment-account balance lose and gain huge sums with great regularity, often with little underlying justification.
For all of these reasons, I prefer to invest in this Buffett favorite and steer clear of cryptocurrency investing as I set aside money for my future.
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