Wednesday, December 4, 2013

Rebalancing your portfolio

A few months ago I helped the boys invest the savings they had (from birthday presents, allowances, etc). I used it as an opportunity to teach them a bit about investing, and also, with the hope that their savings would grow. At the time I suggested that they put 10-20% of their savings into Bitcoins. I explained to them then that Bitcoins had a lot of upside, but were very volatile and could also go way down, but that I felt they were a good long term investment (at least for a small percentage of their savings). They all liked the idea and put about 20% of their savings into Bitcoin, with the rest in a couple of mutual funds. The price of Bitcoins then was $150. The price of Bitcoins today is $1150! I am afraid this experience might have turned them into gamblers!!! Seriously, I told them this morning that they should considering re-balancing their portfolios, because their Bitcoins now represent 70% of their savings.

I put it this way to them: if they were investing their savings today, would they put 70% of them in Bitcoins? Probably not. The fact that their Bitcoin gains come form the appreciation of Bitcoins is irrelevant. Similarly to when they first invested their savings they should allocate a small fraction of them to such a risky asset. If they sell some and keep some they can feel good about what they sold if the price goes down and good about what they kept if the price goes up. A win-win :-).

We also spoke a bit about time horizons and needs. Nico joked that Ale could now buy himself a car. I made the point that if getting a car was an important goal and the value of his investment was enough he should consider selling his investments and setting the money aside for the car. Sure, he might miss some additional upside, but that is OK if he secures his objective. Ale is not interested in a car at this point though, but he might put some money aside for a nice bike :-).

Some people, of course, don't like to "play it safe" but prefer to make big bets.  We often read about these people in the news - at least the ones whose bets pay off. I actually like being bold and taking big risks. That is often how fortunes are made. But you must have conviction on your bets. If one of the boys understood Bitcoins well and had conviction their value would go up, I would be supportive of their investing the bulk of their savings in them. But not just because they "might" go up. That would be gambling.

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