Bitpanda Money Matters #04: choose the right savings and investment strategies

Match your strategy to your goals

Before exploring the investment tools that will support your SMART goals, take a moment to reflect on your investment objective. Do you want to grow your money over decades, or do you need access to it in the next few years? Your risk tolerance and investment horizon will determine the best tools for building your portfolio.

• Short-term (1–3 years): If you’ll need the money soon, then maintaining stability is key. High-yield savings accounts, money market funds or short-term bonds can help keep your savings safe while earning you a little extra.

• Medium-term (3–10 years): A mix of stocks, ETFs and bonds could help balance risk and reward. Also, strategies like dollar-cost averaging can smooth out market fluctuations.

• Long-term (10+ years): If you’re investing for the long haul, you might be comfortable with higher-risk assets like stocks, ETFs or even crypto. The longer your timeframe, the more you can benefit from compounding returns.

We'll explore these strategies with more hands-on examples later, but first, let's take a look at the tools to understand them better:

Investment options and when to use them

Each asset class has its own risks and rewards. Here’s a quick rundown of the most popular choices:

High-yield savings accounts

High-yield savings accounts offer a low-risk way to grow your money while keeping it easily accessible. These accounts provide higher interest rates than traditional savings accounts, making them a good option for short-term savings or an emergency fund. While they don’t offer the high returns of stocks or ETFs, they provide stability and liquidity, ensuring your funds are available when you need them.

• Best for: Short-term savings goals or an emergency fund

• Risk level: Very low – your money is protected, but returns are modest

• Useful if: You’re saving for a big purchase in the next year or two, a high-yield savings account keeps your funds secure while earning more interest than a standard account

Stocks

Buying stocks in companies means you own a piece of the business. Stocks can offer strong growth potential, but they also come with higher volatility. Over the long term, historically, stocks have delivered some of the highest returns. They benefit from compounding growth, where reinvesting profits can significantly increase wealth over time. However, short-term price swings can be sharp, making diversification and a long-term mindset essential for managing risk. 

• Best for: Medium- to long-term goals like saving for a house in 5–10 years or retirement

• Risk level: High – prices fluctuate, but over decades, they historically deliver strong returns

• Example: If you’re saving for retirement in 30 years, a global stock ETF or a mix of individual stocks can help maximise returns

A more affordable and flexible option for investing in stocks is fractional shares, which allow you to buy a portion of a stock instead of a full share:

• Best for: Beginner investors or those wanting to invest in high-priced stocks with limited funds

• Risk level: Depends on the stock – the risk is the same as owning full shares

• Useful if: If you want to invest in expensive stocks like Amazon or Tesla, but don’t have enough for a full share fractional shares let you buy a smaller portion based on your budget

Bonds

Bonds are loans you give to governments or companies in exchange for regular interest payments. They tend to be lower risk than stocks, making them a key part of a diversified portfolio. Government bonds are generally considered safer, while corporate bonds may offer higher returns but carry more risk. Bonds can also provide predictable income, making them a popular choice for conservative investors or those nearing retirement.

• Best for: Short- to medium-term goals like balancing risk in a portfolio or generating income

• Risk level: Low to medium – less risky than stocks, but corporate bonds carry more risk than government bonds

• Useful if: You plan to buy a house in 5 years, investing part of your savings in bonds can provide steady returns with lower risk than stocks

Funds

Exchange-traded funds (ETFs) and index funds allow you to invest in a basket of assets, making diversification easy. They track indexes like the S&P 500, spreading risk across multiple stocks. Because they include many companies, a single stock’s poor performance has less impact on your overall investment. ETFs also offer flexibility, as they can be bought and sold like individual stocks on an exchange.

• Best for: Any timeframe – short, medium, or long-term, depending on the mix of assets

• Risk level: Varies – a bond ETF is safer than a stock ETF, but all ETFs provide diversification

• Useful if: You’re unsure where to start. An S&P 500 ETF spreads your investment across 500 companies, reducing individual stock risk.

A more actively managed alternative to ETFs and index funds is mutual funds, which pool investor money to buy a diversified mix of assets, often managed by professionals:

• Best for: Medium- to long-term investors looking for professional management

• Risk level: Varies – lower risk than individual stocks but depends on the fund’s asset mix

• Useful if: You want exposure to a broad range of assets without managing individual investments, a mutual fund provides diversification and expert management

Cryptocurrency

Cryptocurrencies are highly volatile but offer unique opportunities for investors who can tolerate risk. Digital assets can play a role in a diversified portfolio, but it’s essential to invest wisely and manage risk. Their decentralised nature means they aren’t controlled by governments or central banks, which can make them attractive during economic uncertainty. However, price swings can be extreme, so long-term strategies and careful allocation are key to minimising potential losses.

• Best for: long-term, speculative investing

• Risk level: Very high – prices are volatile, and regulation is still evolving

• Useful if: You can afford risk, allocating 5–10% of your portfolio to crypto could offer diversification and growth potential

Additional investment options

Beyond assets like stocks, bonds, and ETFs, there are other ways to diversify your portfolio. Real estate can provide long-term appreciation and rental income, making it a strong option for wealth building. Commodities such as gold, silver, and oil are often seen as hedges against inflation and economic uncertainty. Meanwhile, investments like private equity, collectibles, or real estate investment trusts (REITs) offer exposure to different markets, though they may require more capital or expertise.

The magic triangle of investing

Each asset class comes with its own balance of risk, return, and liquidity, making it important to choose the right mix based on your financial goals. While stocks, bonds, ETFs, and crypto each serve different purposes in a portfolio, no single investment can offer high returns, low risk, and full liquidity at the same time. 

This is where the magic triangle of investing comes in - a framework that helps you understand the trade-offs between these three key factors and make informed decisions. Learn more in our dedicated guide.

Diversify to manage risk

Diversification means spreading your investments across different assets to reduce risk. Instead of putting all your money in one stock, one asset class, or one market, diversification helps you smooth out losses and capture more opportunities.

Why is this important? Imagine you invest only in one stock. If that company struggles, your portfolio could take a huge hit. But if you spread your money across stocks, bonds, ETFs, and other assets, a decline in one area may be balanced out by gains in another.

How to diversify effectively:

• Spread investments across asset classes: Invest in stocks, bonds, ETFs, and possibly crypto.

• Focus on multiple industries: Avoid putting all of your money into a single asset class e.g. rather than just tech stocks, consider healthcare, energy, finance, and other sectors.

• Look at multiple geographies: Invest in different regions (e.g. US, Europe, emerging markets) to spread risk.

Find more details on how to diversify your portfolio here.

Keep it simple with smart strategies

Investing and saving don’t have to be complicated. By following a few proven strategies, you can manage your money effectively, reduce risk and build wealth over time - without needing to monitor the market constantly. Two simple yet powerful methods to consider are the 50/30/20 rule for budgeting and the cost-average effect for investing.

50/30/20 rule 

One of the easiest ways to manage your finances is the 50/30/20 rule, which helps you allocate your income efficiently:

• 50% to needs – essential expenses like rent, groceries and bills

• 30% to wants – discretionary spending like dining out, entertainment and hobbies

• 20% to savings and investments – building an emergency fund, investing in stocks, ETFs or crypto

This method ensures that you’re covering your essentials while also setting aside money for both short-term enjoyment and long-term financial security. For more practical ways to save and manage your money effectively, check out our article on everyday tips to save money.

Cost-average effect

Trying to time the market can be stressful and often leads to missed opportunities. The cost-average effect is a steady, low-risk approach where you invest a fixed amount at regular intervals, regardless of market movements.

Instead of investing a large amount all at once, it spreads out purchases over time. This helps reduce the impact of market ups and downs and can lower the average purchase price, making it a smart long-term strategy for building wealth consistently.

To see how this works in real life, check out this article, which explores what would have happened if you had started a Bitcoin savings plan in 2024.

Turning strategy into action

Understanding different investment strategies is important, but applying them to real-life situations makes the concepts clearer. Here are three examples of how tailored investment approaches can help achieve short, medium and long-term financial goals:

Short-term strategy: Saving for a holiday

• Scenario: Anna wants to take a dream vacation in two years. She has €5,000 saved but wants to grow it safely without risking big losses.

• Strategy: Instead of leaving her money in a standard bank account, Anna moves it to a high-yield savings account earning 3% per year. She also puts a portion in a short-term bond ETF, which offers slightly higher returns with minimal risk.

• Outcome: After two years, her savings have grown steadily, covering her holiday expenses without exposing her money to high market volatility.

Medium-term strategy: Saving for a house deposit

• Scenario: James and Lisa plan to buy a home in five years and need to grow their savings while keeping risk under control.

• Strategy: They invest 50% of their money in a diversified ETF tracking a stock index, 30% in government bonds, and 20% in a high-yield savings account for liquidity. They also use dollar-cost averaging to invest a fixed amount monthly, reducing the impact of market fluctuations.

• Outcome: Over five years, their balanced portfolio has grown steadily, giving them a solid deposit without exposing them to extreme stock market swings.

Long-term strategy: investing for retirement

• Scenario: Alex, 30, wants to build long-term wealth for retirement in 35 years. He can tolerate market ups and downs since he won’t need the money soon.

• Strategy: He puts 80% of his investments into a global stock ETF, 10% into bonds, and 10% into crypto for higher-risk exposure. He reinvests dividends and uses dollar-cost averaging to stay consistent.

• Outcome: By staying invested for decades, Alex benefits from compounding growth. His portfolio weathers short-term volatility, and by the time he retires, his investments have multiplied significantly.

Build your own investment strategy 

Choosing the right investment strategy isn’t about finding the "best" asset - it’s about aligning your choices with your personal financial timeline and risk tolerance.

Here is a quick recap of when each option makes sense:

• Need money in 1–3 years? Stick to high-yield savings, bonds, or money market funds for stability

• Saving for a goal in 3–10 years? Consider ETFs, dividend stocks, and bonds to balance risk and growth

• Investing for 10+ years? Focus on stocks, global ETFs, and possibly crypto for long-term wealth-building

Now that you’ve got an overview of different investment options and insights into real-life examples, it’s time to take action. Here’s what you can do until next week’s article:

1. Assess your current savings and investments. Do you already have money in a high-yield savings account, stocks, or ETFs? If not, what’s stopping you?

2. Define your risk tolerance. Would you be comfortable with short-term ups and downs for potentially higher returns, or do you prefer stability?

3. Explore passive income options. Research dividend stocks, staking crypto or other income-generating investments. We’ll dive deeper into these next week!

4. Set an investment goal. Whether it’s saving for a house, retirement, or financial freedom, having a clear goal will help shape your strategy.

By taking these steps, you’ll be well-prepared to make more informed investment decisions and build a solid financial foundation. In the next edition of Bitpanda Money Matters, we’ll explore passive income streams - helping you find ways to make your money work for you. Stay tuned!

In the meantime, you can explore more articles on financial planning on the Bitpanda Academy. 

Disclaimer

This article is distributed for informational purposes, and it is not to be construed as an offer or recommendation. It does not constitute and cannot replace investment advice.

Bitpanda does not make any representations or warranties as to the accuracy and completeness of any information contained herein. 

Investing carries risks. You could lose all the money you invest.