Over a month ago, I embarked on a financial journey that was built around evaluating the asset allocation of my retirement funds. Here I now stand, a month older (not sure if I would say a month wiser), and I’m holding bitcoins in my retirement account.
How did that happen?
For those of you who have read the articles in this series on my bitcoin retirement investment, I won’t recount the details of the journey. Rather in the final article of this series, I want to return to the reason for this journey — asset allocation.
Let’s take a look at the definition of asset allocation. According to Investopedia, asset allocation is “an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.”
Even the SEC gets involved by defining asset allocation as “dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash.”
It’s the next part of the definition that is perhaps more important than the focus on what asset categories are considered: “The process of determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.”
Ah yes, the elements of time horizon and risk tolerance. That’s why asset allocation isn’t a one-size-fits-all proposition and is clearly a very personalized and customized process consisting of the following:
- Define your investment goal.
- Where are you in your life?
- How much risk can you take (or what level will keep you up at night)?
My goal is to retire in less than 10 years. Because of this goal, I’m also concerned about taking on too much risk and wiping out my retirement investments, which would extend out my desirable time horizon of 10 years.
If we go online and use an online asset allocator by CNN Money, I soon find that with these goals, time horizon and risk tolerance, I should have 45% of my portfolio in bonds, 30% in large-cap stocks, 10% in small cap domestic stocks and 15% in foreign stock.
But I have a financial adviser. So what’s their conventional wisdom towards my situation?
When you work with someone personally, I believe that there’s more of an ability to properly identify risk tolerance than an online tool can do. They are also more likely to consider all aspects of your situation beyond just your investment portfolio. This can include aspects such as business valuation, real estate and other potential sources of income.
For anyone who has discussed asset allocation with their financial adviser in the last seven years knows, the category of alternative investments has become a consideration for asset allocation as much as the choice of stocks, bonds or cash. There are many reasons for this.
The one that’s identified most often is the need to include non-correlated assets into a portfolio to protect against market meltdowns and economic issues. This means if there’s another economic crisis like 2008, you’ll want assets that will be less impacted than stocks or bonds. Often mentioned as alternative investments are commodities, gold, real estate and hedge funds, which have been available only to the wealthy. Liquid alternatives have been created such as the SPDR Gold GLD, +0.20% exchange-traded fund, which can be bought by any investor. We’re also starting to see funds and other ETFs that mirror hedge fund management styles being made available to the average investor.
As the proliferation of these products for the average investor increases, the discussions about including alternative investments into one’s portfolio is also becoming more of a topic during regular review meetings with one’s adviser.
So how did I ultimately get to bitcoins?
As I’ve learned from the comments received from my past articles in this series, I’m in the minority of investors who believes that bitcoins aren’t only a viable concept, but can be viewed as an investment option as well. Time will prove whether they’re the tulips of our time or the future of payment processing. Either way, there’s no argument from me that they are risky.
However, as the SEC site says about asset allocation, “when it comes to investing, risk and reward are inextricably entwined. You’ve probably heard the phrase ‘no pain, no gain.’ Those words come close to summing up the relationship between risk and reward. Don’t let anyone tell you otherwise: All investments involve some degree of risk. If you intend to purchases securities — such as stocks, bonds, or mutual funds — it’s important that you understand before you invest that you could lose some or all of your money. The reward for taking on risk is the potential for a greater investment return.”
I feel that bitcoins are very risky. Along with that risk, comes the potential for high reward.
Believe it or not, I’m actually a very prudent investor. I believe in asset allocation. I believe in defining a risk tolerance level as what keeps me up at night — especially because I’m a light sleeper.
I also believe that bitcoins can be viewed in a similar manner to gold or real estate. Clearly not in the physical manner (it is a virtual currency, after all), but in terms of investments. In fact the government is now treating their tax status in a similar manner.
A market exists for gold and real estate. A market also exists for bitcoins. The irony is that you can actually exchange bitcoins for cash much faster than you can for gold or real estate. And with no middleman involved.
To me bitcoins fit the bill for an alternative investment and are actually more transparent than a hedge fund type of investment or real estate. I can get a quote on a bitcoin at any time of the day.
As I said, I’m actually a prudent investor and there’s no way that I would consider investing a substantial percentage of my retirement assets into bitcoins. But if the asset allocation models call for someone with my time horizon, risk tolerance and with my investment goals to have 5%-10% in alternative investments, then an investment of 5% into bitcoins seems prudent.
You may not agree with my investment selection and belief in bitcoins. That’s OK — I love the comments I’ve gotten so far. I’ll also be checking in irregularly with where the investment is so that we can see who will ultimately be correct.
However, the one thing that we should all agree on is that asset allocation is an important part of anyone’s investment portfolio. Not only important, but necessary!
After all, I’m a prudent investor (I need to keep telling myself that!).
DISCLOSURE: Jack Tatar has a holding in the Bitcoin Investment Trust, which invests in bitcoins.