Cryptocurrencies have been on a bumpy ride recently, which may have you wondering whether virtual currencies should have a place in your retirement portfolio or not.
If you're considering including crypto among the assets in your retirement investment account, there are five key questions you should ask yourself to determine if this is a good idea.
1. Are you allowed to buy cryptocurrency in your account?
Before considering whether you should buy crypto, consider whether it's even possible to do so. If you're investing in a workplace 401(k), it's very unlikely you have any options since 401(k) accounts usually limit your investment options to a few dozen funds.
Many mainstream brokerage firms that offer IRAs and other tax-advantaged retirement accounts for individuals also don't allow direct investments in cryptocurrencies, although you may be able to buy ETFs or stocks that provide exposure to this asset class.
But if you actually want to buy Bitcoin or other coins directly, you'll need to research financial institutions that both offer retirement plans and provide the option to buy crypto. While there are some out there, it will take a little homework to find the right platform to use.
2. Do you have a diverse mix of safer investments?
Exposure to the right level of risk is crucial when you're investing for retirement because you can't afford to lose the money you'll need to rely on as a senior. Cryptocurrencies are undoubtedly one of the more volatile and high-risk assets you can buy, especially if you're purchasing altcoins rather than more established players.
If you're going to take on the risk associated with virtual currencies, you should do so only after you have plenty of safer investments first. Unless you have a lot of stocks, bonds, and perhaps even some exposure to real estate, you may want to think twice about sinking your retirement money into crypto.
If you already have many lower-risk investments, however, then it may make sense to put a small portion of your retirement portfolio into well-researched coins that you believe have the potential to provide substantial returns over time.
3. Do you understand how to research your investment options?
There are many different kinds of virtual currencies out there, and you need to know how to differentiate between them and what makes one more likely to succeed than others.
It's a good basic rule of thumb never to invest your retirement money in anything you don't understand, and this is even more important with such a volatile asset class.
4. Are you investing for the long term?
Day trading is always too dangerous a practice when it comes to your retirement money since it's very difficult to time the market -- and the chances of outsize losses are greater when you use this strategy. Investing for the long term has a far greater likelihood of paying off for you.
Because of this, if you're hoping to make a quick profit with crypto investing and don't trust that the coins you're buying will grow in value over decades, you should leave them out of your retirement portfolio altogether.
5. Are you OK with the risk of losing your money?
Finally, you should be aware that there's a very real chance your investment in cryptocurrency could decline dramatically and not recover -- unlike, say, an investment in an S&P 500 index fund or in trusted big-name companies that have a strong performance record.
If you can't afford to lose money and still have financial security as a retiree even if your investment goes down to $0, you shouldn't use your retirement capital to buy cryptocurrencies.
By answering all five of these questions, you can make an informed choice about whether this type of investment has a place in your portfolio.