Chris Farrell: It’s Too Early To Use Retirement Savings To Speculate Cryptocurrency
The value of cryptocurrencies in circulation has reached over $2 trillion, an astonishing sum considering that digital finance has only been around for a decade.
Cryptocurrencies will take a step closer to mainstream finance with mutual fund giant Fidelity announcing that it will soon offer a bitcoin option to the retirement savings plans it administers.
Participants in an employer-sponsored retirement savings plan managed by Fidelity could invest up to 20% of their portfolio in bitcoin. However, the decision to add the cryptocurrency option to the plan is up to the employer. Chances are most employers avoid offering bitcoins in their retirement plan at first.
The Department of Labor is concerned about cryptocurrencies in pension plans and employers are conservative with these plans. But some employers will embrace the bitcoin option if employees are pushing hard enough for it. Fidelity will only offer bitcoin, although it may add other cryptocurrencies later.
That said, speculating on bitcoin or other cryptocurrencies in your retirement savings plan is a terrible idea right now and for the foreseeable future.
There may come a time when the market is deep enough with a long enough history for financiers to decipher the benefits and risks of owning crypto in an investment portfolio. Then the asset allocation decision can be reconsidered. But for now, the market is still in its infancy and too risky.
Additionally, a well-researched stock of knowledge has been developed over decades by financiers and economists on how to properly invest in a retirement savings plan. Regularly invest savings in a well-diversified portfolio consisting primarily of low-fee index funds and high-quality fixed-income securities, such as U.S. Treasuries and blue chip companies. Average dollar cost, keep fees low, harness the power of funding, and you’ll have a nest egg to tap into in retirement.
“Investors who avoid high and unnecessary costs and simply sit for an extended period with a set of large, conservatively funded US companies will almost certainly do well,” writes legendary investor Warren Buffett.
This is not a brief against cryptocurrencies. If you want to dive into the market, go for it, as long as it’s money you can afford to lose.
Don’t use tax-sheltered retirement savings. Instead, speculate from your taxable accounts. If your bets go wrong, the tax code will reduce your financial hardship. If you win, you will still be a winner after taxes.
Cryptocurrencies are a speculative asset for trading outside of retirement savings.
Chris Farrell is a senior economics contributor to American Public Media’s “Marketplace” and a commentator for Minnesota Public Radio.