Finance Q&A

Financial Q&A

Protecting your investment portfolio

Q IFinancial Q&A

Q. One of my colleagues suggested that my financial portfolio should include an investment in the digital currency (cryptocurrency) market due to the potential for large gains, global liquidity, and accessibility. Most of the savings I have are invested in my company retirement plan which does not offer access to this type of investment option. I do have an individual brokerage account with funds available to make a purchase. Do you think a cryptocurrency investment would be a wise decision?

A. Before making any investment, you should examine your investment goals. Ask yourself these questions. What are you investing for? How much risk can you afford to take? What is your investment timeline? I would then suggest that you focus on the building blocks of your financial foundation. Create an adequate emergency fund; maximize your retirement contributions; fill in any insurance gaps (disability income, property and casualty, personal liability, life insurance), and reduce high debt levels. Once your financial foundation is solid, use surplus savings for other investment goals (college funding, vacation, second home, charity, and legacy objectives). The digital currency market is an attractive option for speculators, but the prudent investor should treat a cryptocurrency investment as part of an alternate investment goal, not a building block of financial health.

Potential investors in the digital currency market need to consider several investment fundamentals. To start, a cryptocurrency purchase is an investment in a measure of value or means of payment, not an asset purchase like stock shares in an individual company. Furthermore, a direct investment in cryptocurrency is only available through a cryptocurrency exchange, and shares do not have a physical form but exist as a token on a digital blockchain. Indirect investment options are available but extremely limited at this time due to regulatory difficulties. Investors also need to be mindful of the following: digital currency transactions are unprotected by law and often irreversible, investment profits are treated as capital gains, cryptocurrencies are not universally accepted as a form of payment for goods and services, and price fluctuations can be wildly volatile due to supply and demand pressures, as well as psychological factors.

I would recommend that you consult your advisor(s) for a comprehensive review of your financial wellness. They can help evaluate your risk tolerance, highlight financial foundation deficiencies, and determine the appropriateness of alternative investments like cryptocurrencies.

William B. Howard, Jr., ChFC, CFP

International Place II 6410 Poplar Ave., Suite 330 Memphis, TN 38119 Telephone: 901-761-5068 Fax: 901-761-2217 whoward@whcfa.com

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