Cryptocurrency is alluring for a lot of investors. It’s hard to overlook Bitcoin and Ethereum rising to $65,000 and $4,300 (1) in the last few months. But these crypto currencies have also dropped to $36,977 and $2,587 at the time of writing this article.
For someone in retirement or close to retirement, crypto may or may not be a smart addition to their portfolio.
Where Cryptocurrency Stands for Current Retirees or Someone Close to Retirement
A lot of our clients are interested in Bitcoin and other cryptocurrencies. There are stories of people investing $10,000 in these investments that are now worth $1 million or more. High returns on investment are always going to raise a person’s interest.
There are also some people saying that crypto could replace the dollar, which would make it less volatile and a lot more attractive,
The question is, for someone that is close to or in retirement, could you afford losing 40% or 50% of your investment in a month?
Crypto can provide massive returns, but you’re also entering an investment that can cause you to lose a lot of money overnight. Talks of regulating crypto in the past month sent a bunch of the currencies spiraling downward.
Your goal and objective when investing in cryptocurrency will be the determining factor in whether or not to add it to your portfolio. The last thing you want to do is secure your retirement only to see your portfolio suffer massive overnight losses.
Assessing Risk and How Risk Pertains to Crypto
Cryptocurrencies have a lot of risk because it’s still so new. You have strong backers like Elon Musk that can push Bitcoin high with one announcement and cause it to tumble with another.
Government regulations are also another issue.
All of this uncertainty adds to the risk of investing in cryptocurrency. Are you willing to lose 30% to 50% of your portfolio in a few weeks? If not, then cryptocurrency isn’t for you.
When we talk to our clients and run a risk assessment, people are typically willing to risk 5% to 10% of their portfolio. Let’s look at a real-world example. Let’s assume that you have $1 million in a retirement portfolio:
- 5% to 10% loss would be $50,000 to $100,000
- 30% to 50% loss would be $300,000 to $500,000
Wiping out $300,000 of your retirement can be very difficult for a person to withstand. For most people that have been investing and building up a retirement account throughout their adult life, jeopardizing retirement for crypto is simply unthinkable.
There are also some clients that are willing to put maybe 10% of their portfolio, or $100,000 using the example above, into crypto. If the person is comfortable losing this money, they may think that the risk is worth the reward.
How Much of Your Retirement Portfolio Are You Willing to Risk?
If you’re willing to take a risk on the unknown, you’ll want to ask yourself: how much should I risk? You can funnel 2% of your portfolio, or $20,000 into crypto, and keep the rest in low-risk investments.
While you stand to gain and lose a lot, most people are fine with diversifying into crypto if the potential loss isn’t devastating.
If you can afford to lose the money, you should have the mentality that you’re willing to lose it all. Perhaps you don’t mind losing $1,000 or even $100,000, and if this is the case, you can definitely invest in crypto.
We wouldn’t recommend a significantly high percentage of your retirement account being used for crypto because you worked hard for your retirement.
And if you do decide to invest in crypto, what is the upside? Will you pull out of the investment if you see 50% returns, or will you keep your money in the investment for the long-term? There are a lot of questions to ask yourself.
In the ideal world, we advise our clients that have worked so hard to secure their retirement that they should only invest amounts that they’re comfortable losing. The last thing you want is to not have enough money to retire because of a riskier investment.
If you’re close to retirement, are you willing to lose your retirement to crypto?
For most people, the answer is no.
Understanding Crypto Well Enough
Retirement planning is a learning experience. If you want to secure your retirement, you need to understand the investment vehicles that you’re choosing. In our opinion, and through experience, we only invest in things that we understand.
Sure, cryptocurrency has a lot of upsides, but if you don’t understand it, you don’t know what it can be applied to in the real world.
You don’t need to be a teacher of crypto, but we do recommend that if you want to add this investment to your portfolio, be sure that you know how they work.
Crypto is “created.” The coins are mined using processing power. The concept is all digital and essentially made up. But through backing, these digital currencies have been able to grow.
A lot of people want a decentralized currency, and this has given crypto its basis for existing.
You need to ask how crypto works.
- What is crypto mining?
- How are transactions logged?
- What’s the future of crypto?
If you can answer these questions, then you may find that cryptocurrency is a good option for you.
For our clients, we aim for stability in their portfolios. We certainly don’t want to lose all of a portfolio overnight, and we minimize risk with a diversified portfolio. Cryptocurrency is one of the investments that can lose a significant amount of value overnight, so there’s little that you can do to adjust your portfolio to reduce imminent risk,
You can go to bed at night and wake up with 30% of losses.
As advisors, we don’t invest our clients’ money in crypto because there’s far too much risk. We’ve had some clients that want to take on that risk and will invest themselves. But for us, with a long-term retirement plan in mind, we only recommend investing in small amounts of crypto at this time.
If a major government backs a digital currency or creates their own, we may change our mind completely on cryptocurrency investing.
But for now, we only recommend investing in crypto if it’s money that you can lose.
If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’.
In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.