Generation Wealth is your generation, one where building wealth is within reach for everyone willing to make the effort. With wealth comes the opportunity for early retirement from toxic work. Yet building wealth has some basic concepts you need to start managing before you can actually start changing your current reality.

Let’s start with interest and a powerful aspect to it: compounding.

The Power of Compound Interest

To take advantage of compound interest, you simply reinvest interest as capital, allowing you to increase your capabilities of earning interest. This simple trick that allows you to get rich can also be used against you to make you poor. There are two basic parties interested in your poverty, beyond the occasional scammer, who will accept your becoming impoverished to protect their interests:

The State: It will compound against you through inflation to meet monetary and fiscal policy goals.

Creditors: They will compound against you for any unpaid capital and interest to protect their credits.

From this basic explanation, we can extrapolate three conclusions:

Outstanding debt will make you poorer.

Inflation will make you poorer.

Compounding interest from investments will make you richer.

So, a first formula for wealth would be:

Compound interest ＞ Purchasing power lost + Outstanding debt

In a nutshell, what we are aiming for is to earn more through investment than we lose in purchasing power through inflation and interest on debt. As soon as you understand this and start hedging against these risks, you’ll stop losing key value for your early retirement. Don’t let inflation and debt take away your precious time, either!

Beyond this, there are two other key aspects to compounding that create a snowball effect in wealth building: frequency and time. Compounding is not a one-off strategy but a strategy for life. You always suffer from inflation, and you always enter into debts—why not make investment an eternal endeavor? But investing for life will not cut it alone. You need frequency for compounding to work its magic. The more times you compound, the bigger the margin you’ll obtain from your initial investment. I won’t ask you to believe me or give you fancy numbers. Just check any compound interest calculator online and do the math. Your agency toward compounding starts now.

Different Types of Investments

So, now that we understand that wealth is created by investment and multiplied by reinvesting, let’s take a look at the different kinds of investments you can make:

Lending: By lending, you can earn capital plus interest. The most basic forms of lending are CDs in banks, and DeFi lending in the crypto market.

Contributing: By contribution, you can ask back dividends in exchange for your initial investment. The most basic forms of contributions are investments into businesses, stocks, trusts, funds, annuities, REITs and contribution plans.

Leasing: By providing something you own for a period of time, you can earn rent until it fulfills its use. This would mainly happen with immovables and cars.

Reselling: The idea of resale is basic: Buy low and sell high. Real estate and commodities, including cryptocurrencies, are some options within our interests.

Whenever you are on the client side of any of these operations, you aren’t investing but rather spending or saving. For instance, when you buy a home, you pay both the purchase price and mortgage interest. You aren’t investing in real estate yet, unless you lease or resell the property you bought. This means that in finances, goods can work like assets (income generating goods) or liabilities (expenditure generating goods). Coming back to the house, you might be buying it to save on future rent or land costs. But until you put that house under a mortgage, you’ll have a big liability in your life that you’ll have to account for as a possible stumbling block for your early retirement.

Risk and Return

Now that we know that we need to raise money from investments and which activities are investments, we can work on the two ends of any investment, risk, i.e., what you stand to lose, and return, i.e. what you stand to win. There’s generally a rule in investing that the higher the risk you take, the higher the reward you may obtain, but that’s a double-edged sword that can be quite stingy for the inexperienced investor.

But with risk aversion in mind, several investment profiles have been created. Think of these profiles as a spectrum, and you can stand anywhere in these profiles, but you are most likely to start as a conservative investor, become a moderate one, and then end as an aggressive one. But there might be many barriers to adding aggressiveness to your investment; therefore, compounding is necessary to accelerate the benefits of a low-risk, low-reward approach to investment.

So let’s look at the three models:

Conservative: A conservative profile just seeks to beat inflation, but it doesn’t necessarily aim to beat the market or follow it. Generally, a conservative investor will avoid risky investments, but some shares and commodities may be acquired as part of the strategy. The key goal here is to protect cash flow.

Moderate: A moderate profile seeks portfolio appreciation, i.e., to have investments rise in their value while keeping their investments stabilized. The goal here shifts from protecting cash flow to building wealth. A moderate investor will aim for diversification and hedging against risks, so as to obtain moderate gains from a bull market and minimum losses from a bear market.

Aggressive: An aggressive profile will seek long-term gains and stomach any kind of volatility, including possible big slumps in portfolio value, with the hopes of earning more money by beating the market in a long span of time, like ten years or more. Generally, this profile requires some expertise, which I assume you still don’t have. Prepare yourself for this type of investment, but don’t overdo it until you’ve gained solid experience as an investor.

Starting off as a conservative investor isn’t a bad thing, especially if you suffer negative cash flow, i.e., not having cash available when you need it. Eventually, you’ll have to increase aggressiveness in your investments. Otherwise, you are quite likely to get stuck in your status quo, which will harm your potential to retire earlier.

Now, neither aggressive nor conservative are profiles for life. There are different moments in life: one for increasing value, one for consolidating value, and one for turning value into income. If you understand the analogy, then you know that you'll be going through the three profiles at different moments of your life.

Then, if you are going into trading, you need to keep in mind the risk-reward ratio. I’ll be asking you to apply a stop loss at 2% and an exit price at 6%, and you may ask yourself, “Why these numbers? Why should I aim to lose only two percent and only earn 6%?” While these numbers are intentionally low for risk management purposes, they follow a logic: They are in the ideal risk-reward ratio, a 1:3 ratio, where for every loss, you stand to win at least three times. And if you do the math, you’ll know that 2:6 = 1:3. Of course, as you get more proficient at assessing risks and rewards, you may try more challenging ratios.

How to Create a Diversified Investment Portfolio

You need to understand that while we’ll be focusing on crypto, just one asset won’t help you meet your goals. Also, most investor profiles consider three kinds of investment: bonds, cash (money market and CDs), and stock investment. There’s more to that than just these three investments; you have funds and indexes following these investments, real estate, and commodities, which include cryptocurrency.

Diversification is an income stream multiplication technique. If you just work from 9 a.m. to 6 p.m. and that’s it, you have a single income stream. If you lose your job, you’ll have zero income streams and zero cash flow, and you are broke. Diversification is about hedging against losing income streams. Two jobs can be two income streams, but then there’s so little time available for regular work. So, you need assets to work for you as well; that’s the concept behind making investments. Diversification is just having different sorts of assets work for you in tandem, so that if one goes down, the others keep feeding you. This is wealth 101.

This diversity can come in two ways: having assets of a different kind or holding assets of a similar kind. For instance, gold, wheat, and cryptocurrencies are assets of a similar kind, as they are all commodities and operate similarly, but their nature and risk are different. The same goes for stocks and bonds. There are different companies, states, and industries. But you need to know that most times you’ll start small, so your best option for stocks, bonds, and certain commodities can be an exchange fund, where you own a portion of a pool of diversified assets.

When investing in different sectors and instruments, the best advice we can take home is to invest in things we know and understand with as much diversity as possible, within manageable possibilities. A manageable portfolio would consider up to 30 instruments or vehicles, no more. Some of these vehicles should be funds, which secure further diversification. With diversification, it’s best to invest regularly and sell off whatever asset may be perceived as losing value within a five-year period.

So, how should we diversify? First, consider your available cash, for that will determine what your initial investment can be, and then follow this pattern: (1) hedging against negative cash flow; (2) having an emergency fund; and (3) increasing the value of a portfolio. You can’t be wealthy without money, and you can’t ensure the availability of money if you don’t save for a rainy day. Once you have that cleared up, you can then start growing.

Once you have the money to invest, you should consider complementary instruments or industries. Consider a videoconferencing stock and a delivery stock. As these two activities are unrelated, the stocks, as high-risk assets, see their risks lowered when considered as a portfolio, since a crisis in the videoconferencing market will not affect the delivery market whatsoever. You may also consider market capitalization or size for diversifying equity, and credit quality for diversifying debt instruments.

Furthermore, having the money to invest is closely linked to your monetary needs now. The more money you need now, the more liquid your investments should be. And this is tricky because, generally, it’s the least liquid assets that raise the most value. Liquid assets generally provide income rather than value. And cryptocurrencies, which can also be used as a store-for-value despite being liquid assets, take full market cycles to increase in value, which in crypto markets is around four years and in stock markets, seven.

Next, you should diversify, considering time and risk aversion as well. You’ll need money for purchases, so investing should be goal oriented. If you need money to make a purchase, you’ll need some time to liquidate your investment. So, the recommendation is this: The sooner you’ll need the money, the less risk you should take.

Let’s consider some kinds of assets to see their pros and cons. I’ll save cryptocurrencies for later, but consider them as assets sharing the characteristics of fiat money and commodities.

Fiat money/cash: Fiat money, legal tender, or cash are all just plain money as approved by Central Banks. There are a few investments you can make with them like currency arbitrage, lending, and depositing, but you’ll be using it mainly for cash reserves and emergency funds.

Pros: Having sufficient cash allows you to face your needs now.

Cons: If not properly invested, it can lose value to inflation. Hence, money either needs to be saved with interest, invested, or spent within a month of collection.

Risk: Low to moderate. It increases with stringent and unreliable monetary policy.

Debt Instruments: Mainly bonds, this is money you lend in exchange for interest. In debt instruments, you may collect interests regularly or upon maturity date, and these may also be fixed or variable. Generally, the risk associated with debt is that of the debtors’ creditworthiness. The higher the creditworthiness, the lower the risk. This risk can be further lowered by collateralizing or extending privilege status for liquidation.

Pros: It’s a low-risk instrument ideal for compounding strategies.

Cons: You depend on the creditor’s willingness to pay, and you may need to sell or discount the instrument to liquidate it if you can’t wait until the maturity date. This may cause you to lose capital or interest, but it’s also a good strategy for stopping losses.

Risk: Low to moderate. Risks may be hedged through collateral, privileges, or balancing.

Equity Instruments: These are rights to participate politically or economically in a given corporation or venture. Equity instruments have variable rents. Their price is volatile and economic rights may not always result in the distribution of dividends.

Pros: These instruments are adequate for portfolio valuation, and are easy to liquidate unless the sale of equity requires approval by management and other equity holders.

Cons: Direct investment in equity requires solid market and business study. If you don’t understand the business or don’t have enough capital to invest, it might not be an adequate option for you.

Risk: High. To moderate risk, it requires cash as a backup, stop-losses, and diversification.

Certificates of Deposit (CDs): These are loans to financial entities bearing interest that is collected upon maturity.

Pros: It’s an instrument ideal for compounding and building retirement reserves.

Cons: You need to wait upon maturity to collect both capital and interest, which may be troublesome if you have cash shortages.

Risk: Low. Make sure to maintain a healthy cash flow when investing in them.

Money Market: These are interest-bearing accounts or funds which may place limits on withdrawal rights, but don’t freeze money like CDs.

Pros: It provides competitive interest that’s ideal for setting up emergency funds, since money is generally available at the moment or within 48 hours max.

Cons: It will lose value in an inflationary environment.

Risk: Low. Use dollar-cost averaging to compound them.

Funds: These are collections of equity or debt instruments, where you hold a part of the fund. The fund manager may choose to reinvest or distribute dividends.

Pros: It’s an ideal instrument for diversification and small investments. Plus, it’s easy to liquidate.

Cons: You depend on the manager’s prowess to keep the fund’s yield profitable over time. You may have to do fee shopping to find the right fund.

Risk: Low to high. Funds that are pegged to indexes are generally the ones to enjoy more longevity.

Trusts: These are agreements whereby investors may participate as beneficiaries of a venture managed by a trustee. They can provide both variable and fixed rent, and property rights as well.

Pros: Ideal for investing in retailers, wholesalers, and real estate when your cash isn’t enough to invest directly in them.

Cons: You depend on the trustee’s expertise, and unless certificates of debt or participation have gone through an Initial Public Offering, they are quite hard to sell.

Risk: Moderate to high. Balance with low-risk instruments.

Real Estate: This is simply land. You can buy it for sale or lease, or you may lease as a sublease.

Pros: It’s an increasingly scarce asset, so its valuation is ever-rising.

Cons: Land can be trespassed upon, and litigation costs tend to be high. You may face high maintenance costs. Also, it’s a highly illiquid asset.

Risk: Moderate to high. Balance with low-risk instruments. Avoid selling when there are bear markets with liquidity crises. That’s the ideal moment for buying.

Movables: These include vehicles, furniture, or any other property right that can be moved but cannot be consumed nor is fungible (interchangeable by one of the same kind).

Pros: These can increase in value through improvements. In addition, they hold value better than fiat money.

Cons: Amortization, obsolescence, and maintenance costs may cause you to lose your spread on the sale.

Risk: Moderate. Consider insurance.

Commodities: These are either fungible or consumables that can be stockpiled or used as production inputs.

Pros: Their market value tends to be asynchronous, in that they don’t depend on stock or bonds, and rarely do they relate with each other, as with gold and food. Hence, it’s ideal for hedging against equity.

Cons: Storage costs should be considered.

Risk: Moderate to high. Consider insurance.

Intellectual Property: These are property rights over the act of creating art, brands, and inventions. It needs to be original and registered for it to be valuable.

Pros: These rights can be sold, leased, or attached, and you can obtain income through royalty.

Cons: It’s a win-lose game. If your creation doesn’t affect people’s lives, you’ll bear a 100% loss.

Risk: Moderate. You need considerable legal protection to make money out of it.

Art: These are actual pieces of art, detached from their property rights, and held as a collection.

Pros: These become valuable over time, especially if the work contributes significantly to the art scene. Plus, the crypto market has found ways of amplifying investments in works of art.

Cons: There can be strange bubbles, and conservation costs are high.

Risk: High. Consider insurance, and protect yourself against counterfeits.

Getting acquainted with the risk of these assets matters, as the key to any portfolio involves: (a) securing revenue, (b) increasing and stabilizing value, (c) multiplying income streams, and (d) minimizing risks. But before you can do anything with your portfolio, you should consider setting your investment goals.

Importance of Setting Investment Goals

You don’t need money for money’s sake. In itself, money has no value. What has value are the things you can purchase with it. So the question you’d have to ask yourself is, “What would I need to purchase now, in a few years, and in my retirement?” These would be your goals in the short, mid, and long term.

We know that retiring early is a long-term goal, so we need to focus on getting ready as soon as possible for aggressive investing. So, the preconditions for a long-term investment should be satiating any cash flow problems and getting an emergency fund operational.

Once those conditions are in place, an investment goal needs to have these components:

Initial capital: This is the amount of money you are willing to invest.

Time for contribution: How long it’ll take you to invest it.

Risk: This will decide the kind of asset you’ll be investing in.

Money goal: This is the amount of money you desire to raise after investment.

Date for completion: This will set the time by which you should meet your goal.

Need: This is the need that the investment will satisfy.

With these, you can make yourself accountable for the goals you set. You shouldn’t set stringent or lax goals. Remember that if you use compounding, your investment capabilities will increase over time, so goals need to be revised and readjusted as you progress in your investment endeavors. Don’t rest on your laurels.

Strategies for Achieving Investment Goals

Many roads lead to Rome, but each road has its shortcuts . Here are some strategies by which you can use for increasing the value of your portfolio:

Retirement accounts: Many invest in IRA plans, like the 401(k). The issue is that this strategy isn’t necessarily the best for early retirement, as they are meant to be collected by a given age, generally 60 years old. This strategy is complementary in that it can provide a stream at an older age, where maintaining income streams may be harder due to health issues.

Buy-and-hold: To buy and hold is to buy a given amount of an asset, and resell it some years later when the value has increased considerably over time. Again, this is good for risky, long-term strategies.

Momentum investing: Here the idea is to buy at a low price, an entry price, and sell at a higher price, the exit price. This pattern of selling and reselling is short or mid term. This strategy is solid for compounding.

Dollar-cost averaging: Instead of looking for an entry or exit price, this method allows you to purchase an asset at an average value, which will even the risk out by consistently entering at regular time intervals for a given asset. This is a risk-hedging strategy, and one that’s easy to automate, especially if you invest in cryptocurrency.

Index investing: To invest in an index or a fund is to gain access to an already diversified portfolio in the form of a share. Given that these indexes are managed, they have costs that may require shopping (i.e., looking for the cheapest fund).

Growth investing: The key here lies in studying the market for stocks or commodities that show potential for growth in the near future. This strategy is risky, as most of the businesses that fall into this category are startups.

Value investing: Investing in value means looking for undervalued stocks or commodities in comparison with their actual performance in the primary market. This strategy allows you to hedge against beat-or-bust startups.

Income investing: This is using fixed-rent assets, dividend stocks, rent, or DeFi interest for compounding the interest you earn on them. This kind of investment is used to set multiple income streams that pay off at regular intervals.

Arbitrage: It’s a buying and selling, or leasing and subleasing technique where a margin is obtained by offering an asset in a market different to that where it was purchased. This technique can be used in currencies, the exchange markets, and most notably, rent.

In the crypto market, the most used strategies are buy-and-hold, momentum investing, dollar-cost averaging, and income investing. The other strategies are a bit hard to use in the crypto market, though value investing could be used with Ethereum due to the nature of its virtual reality machine. I’ll discuss in greater detail later.

Day Trading

Before we move on, let’s talk a bit about the elements of momentum investing, a.k.a. Day Trading. In day trading, you should have certain elements in place:

Entry price: Price at which you buy the asset. You generally enter when the asset price curve is rising.

Exit price: The price at which you sell the asset to earn a spread. Generally set at 6% above the entry price.

Stop loss: The price at which you sell the asset to prevent a loss. Generally set at 2% below the entry price.

While there are other techniques to set an exit price and a stop loss, these two numbers are the easiest for beginners. You can research those techniques later on. The idea behind this is calculated risk: you buy when there’s a chance for the price to rise, you set an exit price to ensure a profit, and you set a stop loss to prevent losses you can’t cover with your cash reserves. Leaving a stock for too long under momentum trading is simply too risky. If your idea is to hold, then don’t consider day trading; instead, look for the asset you’ve bought in a month or so. Now, remember that day trading is a risky strategy with a risky asset. This means you’ll need an investment plan telling you how much you can put into your trading strategy.

As you move on, you’ll want to know the right time to buy a stock. While you shouldn’t aim to beat the market, there are four indicators for buying and selling:

Support: This is a bottom price level of the asset, indicating a good buying price.

Resistance: This is a peak price level of the asset, indicating a good selling price.

Long: This is a position where you believe that the asset will appreciate as the asset has hit support, hence you buy.

Short: This is a position where you believe that the asset will depreciate as the asset has hit resistance, hence you sell.

With these values, you can see an entry pattern when an asset hits support and then rises, and an exit pattern when the asset hits resistance and then dips. What matters here is not beating the market but yourself. You’ll face many losses and many wins, but if your stop orders are carefully set and you follow them, you are set to win on average more than you lose.