Does Bitcoin Belong in Your Investment Portfolio?
Investing can be a powerful way to build wealth and fund your best life in the years ahead. The great (and sometimes confusing) thing about investing is that you can create a strategy that’s unique to you based on your circumstances and preferences.
General Investing Concepts
Before getting into the actual investment types, let’s define some basic investment concepts:
- Portfolio: Complete collection of investments.
- Return on investment (ROI): How much money your investments generate for you.
- Risk tolerance: How comfortable you are taking risks. Ask yourself: how would I feel if my portfolio lost a lot of money?
- Investment horizon: How long you plan to stay invested. Ask yourself: when do I need to use this money?
- Asset allocation: How you spread your money across different types of investments to both ensure growth and mitigate risk.
In general, riskier investments have a greater potential upside and, if you have a long investment horizon, you can typically withstand more risk as your portfolio will have time to recover from a loss. However, if putting your hard earned cash in risky investments is really going to stress you out, it’s not worth it.
Want to really dive in? Check out this robust glossary of investment terms.
Now that you have a handle on some of the basics, you’ll be able to assess if a certain investment type is appropriate for you.
Popular Investment Types
Please note: The investments discussed below do not constitute a complete list of investment types. To learn about others, please click here.
Bitcoin is a digital currency based on a technology called Blockchain. Seen as a very risky investment, Bitcoin’s value has fluctuated wildly. Further, since it’s not regulated and the system behind it is easily hacked, investors are susceptible to becoming victims of fraud or theft. On top of these pitfalls, Bitcoin is not widely accepted as a form of payment.
Bottom line: If Bitcoin or digital currency intrigues you, do some additional research and proceed with caution.
When you invest in stocks, you actually own pieces of the companies. While the stock market can crash (slashing the value of your portfolio in the process), investors have enjoyed a 10% average annual return. Further, the market has gone up in about 70% of the years that it has existed. To lower your risk, be sure to diversify your holdings so that you’re not reliant on a single stock’s (or any single investment’s) performance. Putting your money into index funds, mutual funds, and exchange-traded funds (ETFs) can help make diversification easier.
Bottom line: If you can handle some risk, and have a long investment horizon, investing in stocks will likely generate a larger return than less risky alternatives.
When you invest in bonds, you’re making a loan to a company or the government. You’ll be paid interest throughout the loan period and receive your principal back at the end of the loan. While bonds are generally safer than stocks (and therefore typically have lower returns), there is still some risk involved. The company that issued the bond could go bankrupt. It’s important to know the bond’s rating, which is one measure of how risky it is to invest.
Bottom line: If the stock market seems too volatile, or if you want to diversify your portfolio, bonds can be a good investment.
Bank products like savings accounts, money market accounts, or certificates of deposit (CDs) are the safest places to stash your cash. However, that safety comes at the price of growth. The interest rates on those accounts are very low, which means your dollars will actually lose purchasing power over time due to inflation.
Bottom line: If you’re really risk-averse, opening a high-yield savings account or CD could help you at least keep pace with inflation.
Your retirement accounts can be as risky or as safe as you want them to be. Both employer-sponsored retirement accounts, like 401ks, and individual retirement accounts (IRAs) can be invested in stocks or bonds. IRAs present other investment options as well.
Bottom line: Saving for retirement now is important even if it’s decades away. In order to build up your employer-sponsored retirement account faster, consider contributing enough to take full advantage of any employer match.
Here’s a handy quick reference about the investments we’ve discussed:
Crafting an investment strategy can be complicated. While Charlie wants to you to spend, save, and grow wisely — this article is meant to be informational only and isn’t intended to provide investment advice. If you’re feeling unsure, please consult a qualified financial professional for guidance.
Tell Charlie: What’s your favorite investment? Why?