Since reaching a record high of almost $20,000 in December 2017, the Bitcoin price has fallen by around 80%. While disappointing, long-term investors are still likely to be heavily in profit, such was the rapid rise of the virtual currency prior to its fall starting at the end of 2017.
While having some exposure to the cryptocurrency may be understandable, having it as a key component of a long-term portfolio may not prove to be a sound idea. After all, it lacks the track record of the stock market when it comes to providing investors with the capacity to meet their long-term financial goals.
For less risk-averse investors, buying Bitcoin and other high-risk assets may seem to be appealing. Such investors may determine that because they have a long-term horizon and an appetite for risk, they should focus on opportunities which could yield high returns.
This standpoint seems to be relatively common among investors. However, it can cause challenges in the long run when it is allowed to influence decision-making within a portfolio which has the aim of providing an income in older age. It can lead to disappointment in terms of failing to achieve long-term financial goals such as retiring early, or paying off a mortgage.
For investors who are determined to own high-risk assets such as Bitcoin, a better idea may be to allocate a limited amount of capital that, if lost, would not impact their long-term financial outlook. In doing so, they are still able to gain exposure to high-risk assets without it significantly reducing their chance of meeting major financial goals.
For the remainder of their capital, which should constitute the vast majority of their wealth, it may be prudent to invest in the stock market at the present time. It has a track record of delivering impressive growth, with the FTSE 250 having recorded almost double-digit total returns on an annualised basis over the last 20 years. Investing in it for the long term could, therefore, allow investors to achieve their financial goals, while having a risk/reward ratio that is within their own control.
While the FTSE 100 and FTSE 250 have risen so far in 2019, both indices appear to offer good value for money. They yield around 4% and 3% respectively, which is relatively high based on their historic levels, and suggests that they could have margins of safety given the risks that the UK and global economies face.
Of course, Bitcoin could rise or fall in future, with its lack of fundamentals making it near impossible to accurately value. Therefore, it may be a sound idea for investors to leave it out of their investment portfolio. Should they wish to buy it or any other high-risk asset, using a limited amount of funds which they can afford to lose could be the best means of doing so in my opinion.
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