To be a good investor, you need to be able to make many good decisions over your lifetime.
Good decisions should be made rationally, not based on emotions. There will be circumstances and situations when time is of the essence and you would be best to act quickly.
Working with an advisor as a guide can help you make even better quality decisions.
You may not own any Bitcoin, but you can learn some great lessons from what has occurred to the price of Bitcoin over the past few years…..and what decisions those who have owned Bitcoin could or should have made.
Bitcoin is a type of currency, but it is not an investment that has a discernible value or worth. Other investments, like a company stock, bond, mutual fund, real estate, collectibles or commodities have prices and values that fluctuate, but there are generally underlying ways to value them over time.
Importantly, our firm does not consider Bitcoin to be an investable asset and we don’t recommend it to our clients. We consider it to highly speculative and very risky. For further background on Bitcoin, see our blog post “Bitcoin Mania: What’s it all about”from December 14, 2017.
As you can see from these figures, the price of Bitcoin has fluctuated widely, both increasing and decreasing. It has been very volatile.
As discussed above, unlike other types of investments, we are not aware of a method to determine Bitcoin’s relative value.
Thus, if someone has decided to buy Bitcoin, we would recommend that they take advantage of price increases to sell some portion of their holdings. You must monitor the price constantly, be decisive and act when the time is right. For example, if you had Bitcoin in December, 2017, you should have sold some then, when the price soared to $16-17,000. The price has more than doubled during the past few months, and risen significantly in the past weeks. Now would be another appropriate time to take some profits. Waiting a few weeks to see what happens would not be rational.
When we invest for our clients, generally in asset class stock mutual funds and conservative fixed income securities, we don’t need to react with quite the same level of speed, as Bitcoin prices have been so much more volatile than stocks.
However, we do monitor and react with decisiveness and speed when appropriate. We are regularly monitoring client accounts for rebalancing and tax loss harvesting during periods of market declines and rebalancing as markets increase. Unlike some investors or advisors that only rebalance or tax loss harvest once per year, we act quickly when market and situations warrant it, as prices can change rapidly. For example, in late 2018 and early 2019, when stock markets decreased then increased, respectively, we placed trades to rebalance or recognize tax losses for clients as appropriate, based on market and timing opportunities. We did not wait, as the opportunity to act and obtain these benefits were gone within days or weeks.
Someone who holds Bitcoin may feel that because the price briefly went above $15,000 in December, 2017, it will reach that level again. There is no way to know when or if that will happen. You should be disciplined. You should not get emotionally attached to this or any other investment. You are best to follow the concept of buying low and selling high. If you bought some Bitcoin for way less than the current price, which is now around $9,000, then you should sell some of your holdings and be happy with your gains. Do not be too greedy.
We are rational buyers and sellers of investments on behalf of our clients. We have a plan in place for each client, called an Investment Policy Statement (IPS), which guides this process. We alleviate the buying and selling decision process for clients, which can provide them with greater peace of mind, as they know we are monitoring when to make these decisions and act. By acting rationally and having an established process, we are not making emotional decisions.
If you own Bitcoin and know you probably should be selling some of it now, but you can’t do it, you are likely letting your emotions control your actions. That is not the ideal way to handle financial decisions.
Diversify. Don’t have too many of your eggs in one basket. This seems so simple and logical, but many people evolve into this situation by owning company stock, receiving stock as an inheritance or getting lucky with Bitcoin they may have bought years ago. It is generally not a good idea to have more than 5-10% of your investable assets in any single investment (not including diversified investments, like a mutual fund). You cannot be afraid to take some profits. Even if you sell a percentage of what you own now, and retain a certain amount, you have to learn not to regret taking your profits….as there can be just as much chance the price could go down, or up, in the future.
When we design portfolios for clients, we evaluate how much risk they need to take, in order to reach their financial goals. We construct portfolios that are broadly diversified across many industries, asset classes and throughout the world. We want to avoid the risk of one bad thing that could happen to any company from having a material impact on your financial future. This is rational, logical and just makes sense.
If you have a significant portion of your portfolio in a few stocks or something like Bitcoin or gold, then you are taking on more risk than is necessary. Even if you own lots of a stock that has done really well in the past, like Apple or Amazon, there is no guarantee how that stock will perform over the next 5, 10 or 15 years.
We believe in broad diversification, knowing that it may not be as exciting. But this approach will likely enable you to reach your financial goals and also do it in a manner that will allow you to be less concerned about your finances than if you only held a few stocks in your portfolio.
We can help you be more decisive, rational and less emotional about your investments. Just talk with us.