Bitcoin's price rise in 2020 may have increased its appeal among some investors. They may feel that it has momentum and could be a sound means of improving their retirement prospects.
However, the virtual currency carries significant risks that may derail its future performance. As such, following Warren Buffett's tried-and-tested method of buying cheap shares in high-quality companies could be a less risky, and more profitable, means of planning for retirement.
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Bitcoin's major risks
Bitcoin may have made strong gains in 2020, but it continues to face significant risks. They include the fact that it has no fundamentals. Unlike shares, which have earnings and assets from which an investor can deduce their intrinsic value, the virtual currency's price level is solely dependent on investor sentiment. As a result, its price can be volatile and susceptible to large movements without clear reason.
Since it has no fundamentals, investors cannot deduce whether its gains in 2020 mean that it is overvalued, fairly valued or undervalued. Buying any asset without a margin of safety versus its intrinsic value is likely to pose significant risks. It can mean disappointing returns, since investors may have already factored in a positive outlook.
Furthermore, Bitcoin has a limited size that may restrict its capacity to ultimately replace traditional currencies. Alongside its lack of infrastructure, this may mean that it has less real-world value than investors are currently anticipating. The end result could be that its price suffers, since investor expectations may not be met over the long run.
Following Warren Buffett in buying cheap shares
While Bitcoin has risen significantly in recent months, there are still a number of cheap shares that could deliver strong returns in the coming years. Many sectors remain out-of-favour with investors. In many cases this could be because of short-term challenges that gradually give way to more prosperous operating environments. This could mean there are a number of undervalued shares available to buy today in a wide range of industries.
Warren Buffett has become one of the wealthiest people on earth through simply buying attractive companies when they trade at low prices. As such, investors who are seeking to build a retirement portfolio can follow his method today to capitalise on a likely long-term stock market rally over the coming years.
Clearly, there are likely to be periods of volatility and uncertainty in 2021 that may mean Bitcoin outperforms shares at times in the short run. However, the track record of the stock market shows that high single-digit annual returns are very achievable from holding a diverse portfolio of shares.
And, with many attractive companies trading at cheap prices today, there may be opportunities to outperform the stock market as it recovers from the effects of the 2020 stock market crash.
