Since pretty much everyone who’s reading this is a domain investor, I’m reasonably confident a relatively large percentage of your wealth is represented by your domain portfolio.

This can be quite dangerous in several situations.

Now don’t get me wrong, I love domains. They’re my favorite asset class by far and I’ve dedicated an entire section of my Wealth Management 2.0 book to them. Unlike most of the economists who wrote books about personal finance, I understand exotic assets (domains, bitcoin, etc.) very well.

But maybe primarily because I’m an economist, I also have to look at domains with a critical eye.

Let’s face it: in several scenarios, your domain portfolio might end up proving to be paper wealth and that type of wealth can go from looking great to evaporating just like that.

Here are a few examples of situation in which having an overly domain-focused wealth strategy could backfire:

1) Emergency situations

Even in times of relative economic stability, most domains are anything but liquid. A lot of people say “my portfolio is worth $x” but how much of that $x would you be able to get if you had to sell it immediately? Probably only a fraction.

And make no mistake, you’re a mere mortal just like anyone else and something like unexpected medical expenses can and will take their toll on your wealth. They certainly have in my case several years ago!

2) Liquidity crunches

#1 is an example of a situation involving primarily your own life. But what if another financial crisis strikes and a generalized liquidity crunch ends up being the status quo? In such cases, domains that are already for the most part on the illiquid side as it is end up becoming orders of magnitude more illiquid.

The great thing about domains is that it’s possible to generate huge returns with them if the right conditions present themselves. The bad thins is that in adverse scenarios, a portfolio might end up becoming worthless overnight.

3) Wars, social unrest and so on

There are certain things our parents and grandparents didn’t even dream about and that we take for granted, as if nothing could/will ever happen that limits our access to them. The Internet, for example. So many of our systems are ridiculously dependent on the Web and without the Internet, our day-to-day existence would suffer huge, huge disruptions.

As unlikely as the prospect may seem and as much as I hope these things won’t happen, a major event such as a war would have devastating effects when it comes to the Internet and should such scenarios materialize, your portfolio will end up proving to be worthless.

… those are just 3 examples of situations in which a domain portfolio can prove to be nothing more than paper wealth.

Don’t let the fact that you’re sitting on an impressive portfolio numb your critical thinking abilities. Always understand the limitations of this asset class and for the love of God, don’t forget to take money off the table every now and then!