Last week, an article in described a trend that I, too, have been with concern. According to Business Insider, Millennials in the San Francisco Bay Area are seeing the “once in the lifetime” returns that Bitcoin has brought some of its investors, and they want in on the opportunity to get rich quick.
The temptation for Millennials to take a chance on Bitcoin is understandable:
· Overwhelming student debt. “Knowing that a conservative investment plan will generally have pretty astounding returns on a long enough time horizon doesn’t seem to mean much when it looks like you’ll still be indebted for much of that time frame due to student debt,” writes Kyle Russell in Business Insider.
· The American Dream is further out of reach for Millennials than it was their parents and grandparents. “The American dream means buying a house, and accomplishing that AND paying off student debt AND building up a nest egg AND saving for your kid’s education seems impossible. Instead of investing slowly and steadily, they’d rather gamble for the chance to accomplish all of those things,” writes Russell.
I get it. When you feel that the odds are heavily stacked against you, it’s easy to reason, “What do I have to lose?” and convince yourself that gambling on an aggressive investment like cryptocurrencies is a smart move.
Except that it isn’t.
Millennials see the media coverage frequently granted to celebrity investors making big, splashy returns on the high-risk Bitcoin investments, but rarely does the media point out these high-flying investors probably have an enormous and well-diversified portfolio to begin with. These risky bets represent only their “aggressive growth” holdings – i.e., the part of their portfolio that they can afford to lose.
Investment decisions that slowly build financial security, step by step, on the other hand, rarely make headlines. As a result, the misconception that dealing with one’s money is all about “playing the market” for a big investment win has become dangerously common.
My advice to Millennials tempted to invest in Bitcoin or other cryptocurrencies in an effort to get rich quick: Don’t! Instead:
1. Allow yourself to hope. The student debt crisis and challenging economy are not impossible obstacles to achieving financial security. So, don’t let hopelessness push you to take unnecessary risks with your money. Start now, step by measured step, and you can reach your financial goals. Remember, time is on your side.
2. Build your investment portfolio steadily and systematically – from the “middle out.”
· When you’re just getting started investing, put your incremental savings into stocks and bonds, ideally through low cost mutual funds, in different vehicles such as your 401(k), investment portfolio, and IRA, in the appropriate balance for your age.
· In your early years, the right mix for you will lean towards a higher percentage in growth investments. Over time, however, the right mix for you will transition toward income investments, generally in the range of 80% for growth and income investments combined.
3. In the future, after you have the first 90% of your investment portfolio solid overall, you may consider riskier investments with the remaining 10%. When you have a balanced portfolio of growth and income investments, and the right amount of cash (up to 10% depending on your circumstances,) it may become appropriate for you to “play with” the final 10% of your portfolio, and explore more aggressive investments that offer potentially high returns. But keep in mind that these investments are by definition highly speculative and risky. They are only appropriate for you if you can literally afford to lose what you invest!
“Playing” with risky investments like cryptocurrencies is only appropriate when your overall financial security is not at stake – and most Millennials have not yet reached this point. So, start where you are, and steadily build the foundation that makes long-term financial security possible.