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When I wrote about dogecoin a few weeks ago, I received a few dozen emails from readers interested in investing in cryptocurrency. Many of those who wrote asked which crypto is better, while others wanted to know how much to buy.
Very few people have asked whether or not they should invest in crypto; it seemed obvious that they should.
But cryptocurrencies alone are not a good investment, say investment experts; nor other currently popular investing trends, including owning stocks meme like GameStop, or day trading in general (GameStop did not immediately respond to request for comment). Cryptos and stocks memes are extremely volatile, and research shows that you are much more likely to lose money in day trading for the long term than profit.
While these alternative investment strategies have captured the imaginations of Millennial and Gen Z investors, financial planners are urging young investors to remember that they shouldn’t be a substitute for a more standard, if not boring, foundation. according to some.
Interest in these investments can be partly attributed to the fact that younger generations feel excluded from traditional forms of wealth creation, says Leanna Haakons, founder of Black Hawk Financial. While millennials, on average, face higher student debt and a higher cost of living than Gen X or Baby Boomers, they have also seen wages stagnate and full-time jobs replaced by part-time concerts. This gives them less money month to month to put aside in an index fund.
A get-rich-quick scheme that requires a one-time cash deposit is appealing when you feel the game is against you, says Haakons. It’s enticing to see memes stock prices and, at times, cryptos soar.
But these volatile assets shouldn’t be the primary asset of an investor, especially those just starting out, says Brad Wright, a Boston-based certified financial planner. “People think that these [assets] will never go down, and that’s a bad state of mind, ”says Wright.
Just as you wouldn’t rely on a lottery ticket to fund your retirement, you shouldn’t rely on GameStop or dogecoin.
Building a solid foundation
Instead, boredom is better for 99% of people, Wright says.
“We try to temper customer enthusiasm for this by suggesting that they take care of their bases first,” says Wright. This means investing consistently in low cost index funds. These all-in-one funds provide investors with exposure to a full market index at a reasonable price. And those with a diversified investment portfolio will likely outperform those who invest all of their money in a single asset.
The traditional investments found in index funds have underlying value, says Haakons. Companies have earnings on which investors can base a valuation. But crypto, for example, doesn’t. And memes actions become memes in part because their valuations are so distorted from reality. Walk carefully.
Understanding the risk
Understanding the risks of investing in a crypto or a stock meme is crucial. While investors may see the headlines about prices rise and fall, many are unprepared for the eventual drop, Wright says. “You have to accept the possibility of losing your entire investment,” he says.
Investors should not allocate more than 2% to 5% of their total portfolio to speculative investments, including crypto and art, suggests Wright.
And if you buy one of those speculative assets, have an exit strategy, says Leon LaBrecque, a certified financial planner based in Michigan. If you buy into Clover Health, or some other meme-of-the-day stock, and it starts to do well, he suggests selling half. See what happens to the remaining investment. “You can’t lose money by taking profits,” says LaBreque.
But the rest of your portfolio should be stable, long-term investments.
“If you assess your risk and are properly diversified into a slowly and steadily growing portfolio, you can take a small percentage and be more speculative with it,” says Wright. “But it must be proportionate.”
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