Portfolio allocations are some of the most crucial decisions a yield farmer will make. Don't let yours be an expensive afterthought.
In this post, we’re walking you through the thought process expert Yield Farmers use to make their plan of action for farming the rest of 2022. We’re going to look at token allocations, blockchain choices, and other factors involved in successful Yield Farming.
Investment plans are unique to each investor, but the goal is always the same: to give you a viable strategy and help you make the most profitable decisions long term.
The steps for building a yield farming portfolio can be split into four specific sections:
- Investing Mindset
- Plan Objectives
- Asset Allocation
- Portfolio Example
Each section is equally crucial for your long-term success in the world of DeFi.
The Mindset of a Successful Yield Farmer
The most successful yield farmers are avid practitioners of DYOR (“Do Your Own Research”), as they never ape into projects without solid due diligence.
If you display a child-like curiosity and an unquenchable thirst for knowledge, you’ll likely do well in this world, as the DeFi space rewards investors in pursuit of endless education. However, it's vital not to lose your risk-management principles, fall into FOMO, and deviate from your original plan.
You’ve likely heard these concepts before, and admittedly, they can sound like a broken record. But they’re crucial for your success in a wild west world like crypto. Everyone “knows” they should focus on long-term growth, profitability, and consistency. Yet most get sucked into sketchy projects with ridiculously high APYs and never make any real, life-changing progress.
In addition to solid investing fundamentals, remember that yield farming is an exciting world and extremely fun once you’ve gotten your feet wet. So don’t forget to have a blast when you’re building a better future for yourself.
The 4 Crucial Objectives For Your Crypto Portfolio
Understanding your investment plan’s objectives requires understanding the level of effort and tolerance you will have for yield farming in general.
Ask yourself the following questions:
What Are My Personal Investment Goals?
Consider the minimum rate of return you would be happy to generate every year.
We have plenty of investors with high-performing careers, such as doctors, lawyers, engineers, and bankers, in our programs. For them, a safe and reliable strategy without a large time commitment makes the most sense.
We also have a profusion of full-time farmers who, in addition to their safe strategy, have the time and energy to find riskier “degen” plays with huge potential upside.
Figure out where you stand, and no goal is right or wrong. Your personal strategy and portfolio allocation will always be custom to you.
How Much Time Can I Commit To Yield Farming?
Depending on the number of positions you have on what blockchains, managing and researching those positions can take a fair chunk of time. Think about which of the following three categories you currently fit in:
- Slow Cooker: You have less than 5 hours a week or cannot check daily on positions or research.
- Part Time: You have up to 10 hours a week or less than 3 hours per day to devote to research and maintenance.
- Full Time: You have considerable time daily or have a routine to devote to maintaining your positions and researching.
The reason for asking yourself this question relates to the positions you should be considering, as volatile market conditions will not always be in your favor. For example, low-risk positions are perfect for you if you’re a slow cooker. But, on the other hand, if you’re a full-time farmer, you have space to participate in high-risk plays that require more time and research.
What Is My Risk Tolerance?
Understanding your risk tolerance (or aversion) is critical to where you should be investing your money. On a scale from 1 to 5 (five being the highest), put yourself in one of the following categories:
- Conservative: 1-2
- Medium: 3
- High-Risk: 4-5
It’s natural to want to gather excellent yields, and it makes sense to mix all three risk tolerances. However, in the long run, it’s best to know where your natural risk tolerance lies to make sound and effective decisions.
A good question to ask yourself when deciding your risk tolerance is:
How would I feel if my portfolio dropped 70%? If the answer relates to being scared, anxious, and uncomfortable, adjust your portfolio accordingly.
How Much Money Will I Be Putting In?
If you are not farming with enough capital, certain types of yield farms (especially medium and high-risk ones) are not worth investing in because your rate of return diminishes as time goes on during the life of these farms. In these cases, your money is better off finding other ways to accumulate for yield.
Your starting capital also determines what Blockchains are best suited for you to farm on. Due to gas fees, playing on the Ethereum network is not worth it unless you have at least $100,000 to allocate to your portfolio.
If you have less than $100,000, it’s best to stick to Blockchains with cheaper gas fees, such as Solana or Fantom.
Asset Allocation With A Proven Framework To Follow
Allocating funds you are looking to invest into buckets makes measuring your growth much easier and more efficiently. The following breakdown is simply an example and, based on your risk tolerance, investment beliefs, and total investment amounts, should change periodically, specifically to market conditions and the availability of farms that meet your objectives stated above.
Here are four buckets to keep in mind:
- Long-held assets (40%): This bucket should contain assets you will hold for a minimum of 1-3 years and are assets you have much conviction in holding. For many investors, this is Bitcoin and Ethereum. If you hold multiple assets as long-holds, consider narrowing this play to 5-7 assets maximum.
- Low-risk or market-neutral plays (40%): Stablecoin farms are the main play in this allocation that will get you guaranteed growth on a daily/weekly/monthly basis. Consider shifting more of your plays into this bucket when the market is down.
This allocation can also be produced from staking BTC/ETH in an AMM like Aave, BenQi, Port Finance, Anchor Protocol, Tranquil Finance, or Trader Joe (Banker Joe) as collateral and borrowing stablecoins against the collateral.
- Medium-risk or low-market cap plays (15%): Medium-risk plays can help your portfolio grow substantially depending on the farms you invest in.
Generally, this bucket includes platform-native or DEX-native coins paired with either the platform-native coin or a stablecoin LP or multi-asset grouping.
APYs can be anywhere from 50% to 300%.
- High-Risk Plays (5%): Generally, you pair extremely volatile assets at significant directional exposure. In addition, the risk of counterparty failure, “rug pulls” or exploits are magnified.
APYs can often be in the thousands and more, but the half-life of projects is often short and not guaranteed to last long.
The key is to get in, secure profits fast, and get out. Then, once you’ve doubled or tripled your money, take the initial capital out and let the rest ride for as long as you decide.
Portfolio Example From A Professional Yield Farmer
Including all four buckets in your crypto portfolio is never a requirement, nor is it recommended if you’re new to this world. Even if it aligns with your risk tolerance, it’s best to avoid high-risk plays until you’re a distinguished and confident farmer.
For yield farming beginners, it’s best to stick to the all-weather portfolio. It’s a proven strategy we recommend to our Mastermind members.
It looks like this:
- 40% BTC
- 40% ETH
- 20% Other Tokens
Other tokens could be AVAX, SOL, GMX, or whatever you're bullish on.
Here is an example of what that portfolio could look like:
The Advanced All-Weather Portfolio
If you want greater exposure to the opportunities in crypto, consider an advanced version of the all-weather portfolio. Again, this is the recommendation we share in our private Mastermind.
It looks like this:
- 40% BTC/ETH
- 40% Stablecoins
- 15% Other Tokens
- 5% High-Risk Degen Plays
With this portfolio, the “other tokens” are the projects you’re bullish on for a medium and long-term timeframe. These are projects like AVAX and GMX. Lastly, you get the right amount of exposure to the potentially fun and high-risk plays.
Here is an example of what a portfolio like that could look like:
The purpose of the all-whether portfolio is to make you comfortable in every type of market scenario. If you can’t handle your portfolio going down more than 50%, your best bet is to stick to stablecoin farming and use your profits to buy riskier assets such as BTC or ETH.
Quick Bear Market Caution
As of writing this article, the current market conditions are bearish, with Bitcoin and other risk-on assets in a downtrend. During periods like these, altcoins are likely to get hit hard.
Your #1 job during a bear market is to survive. Loss prevention, capital preservations, and downside protection risk management keep you alive in crypto. It’s, therefore, crucial to adjust your portfolio when the market is in a downtrend.
Consider being heavy in stablecoin farms during bear markets to survive. You will appreciate not having to play “catch up” when the markets start soaring again. Remember, bull markets can make you rich, but bear markets can make you wealthy.
The point is not to tell you which projects to include in your portfolio but to inspire and help you develop a long-term strategy that works for you. Unfortunately, too many people get burned in crypto, and it's because they jump into projects without doing a lick of research or don’t have a thought-out investment plan to begin with.
Approaching your yield farming journey like a professional will get you further than you can possibly imagine. By just creating a well-balanced plan and sticking to it, you’re already doing something 99% of people are not willing to do. And that alone can put you in the top 1%.
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The information contained in this post is for educational purposes only. Any results or hypotheticals discussed are not typical and are not a guarantee of your success. Yield Farming employees are experienced cryptocurrency investors. Your results will vary depending on education, work experience, and background. All investments involve risk, and the past performance of a security, industry, sector, market, financial product, investment strategy, or individual’s investment does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs.