- I think it’s fair to consider the pros and cons of all investments, including crypto.
- If you’re near retirement, bitcoin probably isn’t right. But if you have decades, it may be worth it.
- Start by understanding the risks involved — and whatever you do, avoid herd mentality.
What was once a niche investment is now becoming mainstream — a vast majority of adults have at least heard about cryptocurrency, and 16% say they’ve invested or traded crypto. Now, the investment may be coming for your nest egg.
Last month, Fidelity said it would allow investors to add cryptocurrencies like bitcoin into their 401(k) retirement accounts, one of the first major retirement plan providers to do so. You can also open a bitcoin IRA, an account that includes cryptocurrency within its portfolio. While some crypto fans are celebrating these moves, many experts are concerned about the risks.
As a financial planner, I don’t recommend rushing out and investing in something just because it’s available. But that doesn’t mean cryptocurrency can’t fit into your portfolio.
Why invest in cryptocurrency?
While there are plenty of risks involved with investing in crypto (which I’ll get to later), there are some positives. The first is portfolio diversification. Most financial experts (including me!) sing the praises of a diversified portfolio, which better protects you from market
Cryptocurrency has the potential to be a diversification tool, as the price often doesn’t move in accordance with the rest of the market. It may also be used as a hedge against inflation.
While bitcoin specifically often fluctuates in price, its value has generally trended upwards. If you want to invest in crypto as part of a buy-and-hold strategy in your retirement plan, it may be a smart option.
Here’s my advice on what to consider before adding cryptocurrency to your retirement plan.
1. Review your financial plan
But before doing anything, make sure you have a good grasp of your financial situation and your goals.
Are you on track to retire? Before adding any new investment to your retirement portfolio (including cryptocurrency), you’ll want to make sure it fits into your long-term goals.
How much of your portfolio should go into cryptocurrency — if any at all — depends on your financial goals and risk tolerance. If you’re only a few years away from retirement, it may not make sense to put any money into cryptocurrency.
Conversely, if you’re decades away from retirement and want to take a risk, adding cryptocurrency to your retirement account may be an option for you. Remember — this isn’t a “get rich quick” scheme. Any money you add to your retirement account should stay there, untouched, until you retire.
If you want to invest your nest egg without activity managing your account, consider a target-date fund. Many retirement accounts, like 401(k)s and IRAs, offer target date funds, which automatically adjusts your portfolio allocations over time. The closer you get to retirement, the more conservative your portfolio will become.
As of now, cryptocurrency will not be a part of target date funds’ allocations — so if you want to invest in crypto, you’ll likely have to choose your portfolio allocation yourself.
2. Understand the risks involved
Cryptocurrency is a volatile investment, and experiences sudden and sharp price fluctuations regularly. Because of this, you should be wary of investing too much of your money in it. While cryptocurrency has the potential for lucrative returns, it also comes with many risks and the chance for huge loss. Case in point: Bitcoin has fallen below $30,000 since hitting a record high of $69,000 last November.
What’s more, keep in mind that past performance doesn’t always mean future gains. Even though bitcoin rose in the past doesn’t mean it’s going to make gains anytime soon (or ever!).
Remember the importance of a diversified portfolio? That means avoiding investing too much of your money in one thing, including cryptocurrency. Fidelity allows you to invest up to 20% of your portfolio in bitcoin, but I wouldn’t recommend investing that much.
Lastly, when deciding which cryptocurrency coins to buy, I would recommend sticking with the established, well-known names like bitcoin or ethereum, over rising players.
3. Avoid herd mentality
It may seem like everyone else is getting in on cryptocurrency — it’s hard to miss the headlines about cryptocurrency millionaires. But crypto isn’t right for everyone.
Crypto prices have been influenced by viral demand, social media, and Elon Musk’s tweets. Many investors will jump on cryptocurrency without taking the time to review their financial goals and doing proper research. Don’t be one of these investors!
All investing comes with risk, and I believe that even the most volatile investments can be considered, as long as you’ve given it careful thought and deliberation.