Be Prepared to “Lose the House.”
The nature of these investments is that they should not be something that should be anticipated to be relied upon wholly for retirement. They are often more hobby and passion than solid investment and should be treated as such for financial planning. A general guideline is that no more than 5% of your savings for retirement should go to these strategies, and for many individuals the percentage is even lower than that. While losing everything even in the riskiest of investments is not a certainty, when planning for these investments, one should anticipate not having it in the future to hedge against the uncertainty inherent in speculative items.
Beware of FOMO!
When the news is showing doubling and quadrupling of assets such as Bitcoin, and you have that annoying colleague who keeps talking about how they are “killing it” on crypto, it can be tempting to ignore the top two principles and bite off more than you can chew. This is a mistake and you need to condition yourself against a herd mentality. While speculating as a fun hobby can be rewarding on a personal fulfillment dimension, one should not anticipate it being rewarding financially (though that’s definitely an added benefit!). Don’t give in to FOMO and make sure you heed the discipline in your financial plan.
Crypto Can Be Part of your Retirement Strategy…. But Be Careful
Some financial advisors actually advocate for putting a small amount of your retirement allotment in cryptocurrency as part of your financial plan. While not a mainstream idea, there are three arguments to be made in favor of this.
- First, retirement strategy is all about diversification; that is, getting as many asset classes as possible to diversify risk away from any one item. By avoiding “putting all your eggs in one basket”, if the stock market tanks, in theory an asset that does not track the stock market (such as cryptocurrency, gold, or other financial instruments) could shield you from these swings.
- Secondly, while many consider the current upswing in cryptocurrency a bubble, it could be part of the new reality in the financial world. Bitcoin has been in existence for 13 years and, while incredibly volatile during that period, has at least established itself as an instrument that will continue to exist for the near future. While bitcoin is certainly not the only cryptocurrency (recent estimates put the number of cryptocurrencies at around 6,000), they are the most “traditional” and stable of the cryptocurrencies, and useful as a point of reference for the asset class.
- A third argument for the role of crypto in a retirement portfolio is that many small cap stocks are higher risk than cryptocurrency and yet find themselves in many retirement plans whether they are through index funds or otherwise.
The takeaway is that while cryptocurrency may not have a place in all financial plans, treating it similarly to a small cap index fund and investing under 5% of your total retirement plan in it does not seem unreasonable for the adventurous investor.
If You Aren’t Into Crypto But Still Want Alternative Investments, Other Options Exist
Many investment platforms exist for asset classes outside of traditional means. These include Yield Street, Fundrise, and Crowd Street. Investors in these entities can invest in portions of a real estate fund, art, legal settlements, and a variety of other interesting investment opportunities without the high financial commitment that such investments often require. Investments tend to be difficult to cash out (illiquid) and have higher fees than traditional funds, but with the promise of a potentially higher return. Angel investments, or investing money in startup industries, can be a high risk, high reward opportunity, but often connections to proprietors of such companies need to be established. Online forums such as Angel List can provide that connection, but again, these relationships can be high risk and require more research than a traditional investment.
For those who are handy, real estate investing is a popular pastime, and can provide potential tax benefits outside of the income from the rental or sale of property itself. Additionally, real estate investing to renters can provide both an income stream and a physical asset, which can be a comfort to some people. As with cryptocurrency, it is unwise to invest more than 5% of your retirement portfolio in such entities, but they can provide personal satisfaction and a diversification beyond that capable in traditional investments.
While alternative investments don’t have a place in everyone’s retirement planning, they may for those willing to accept a little extra risk or those with hobbies or interests outside of medicine that they would like to nurture in this way. By further exploring your interests through communities such as Facebook’s Physician Side Gigs, Physician Community, Physician Real Estate Investors and numerous others, you can broaden both your extra-clinical interests and potentially find a path towards further financial security. Additionally, we all have dreams of retiring someday (part of what this blog was created for!); establishing a smaller income flow and pool of interests outside of medicine could set up a more satisfying retirement or second career for many.