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How much crypto should be in your retirement portfolio?
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With the resurgence of the price of Bitcoin – partly driven by the Securities and Exchange Commission’s (SEC) January approval of Bitcoin spot exchange-traded funds (ETFs) – there has been renewed interest in the crypto space lately.
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This has also brought not only institutional legitimacy to the space, but also easier access to cryptocurrencies, as the numbers prove. As of April 9, Bitcoin spot ETFs held $56.35 billion in assets under management, according to data from The Block.
“Many investors are considering investing in crypto in their retirement or tax-advantaged accounts given the historical tendency of crypto assets to provide outsized returns,” said Rayhaneh Sharif-Askary, Shades of greyresponsible for products and research. “When making this decision, investors should consider their crypto allocation in the context of their broader investment portfolio, risk appetite, and income needs.”
Grayscale is one of the companies that launched a spot Bitcoin ETF in January. As of April 9, its assets under management stood at $23.1 billion.
Highlighting the growing interest, an Unchained survey found that 23% of US investors who do not own Bitcoin would consider investing in the asset through their 401(k), IRA or other retirement plan in 2024.
Now, while experts recommend diversification as a cornerstone of a safe and comprehensive retirement portfolio, advice varies when it comes to including crypto in these portfolios.
So how much crypto should be included in retirement portfolios?
Less than 5%
Several experts say that due to their inherent volatility, investors should devote no more than 5% to cryptocurrencies.
“The crypto allocation in a retirement portfolio can vary depending on an individual’s risk tolerance and financial goals,” said Michael Collins, CFA and Founder/CEO of WinCap Financial. “However, our general guideline would be to allocate less than 5% of the portfolio to crypto assets. For the sake of transparency, our clients do not own crypto in their retirement portfolios, as we believe we can achieve a better risk-reward profile with small-cap stocks.
Grayscale’s Sharif-Askary echoed the sentiment above, saying research suggests that around 5% of a portfolio allocation to crypto can result in the highest risk-adjusted returns on average, although with higher portfolio volatility, for investors who otherwise held a classic mix. stocks and bonds.
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“Crypto is a volatile asset class, so a little goes a long way,” Sharif-Askary added.
Learn more: 13 Cheap Cryptocurrencies with the Highest Upside Potential for You
Target 5% to 10%
Although crypto is generally considered a risky asset, Michal Rozanski, co-founder and CEO of Empirical – argued that it still offers one of the highest risk-reward ratios among asset classes.
“So we recommend devoting 5 to 10 percent of the retirement portfolio to it, depending on when you retire,” Rozanski said. “We expect the volatility of this asset to remain high, but the low correlation of cryptocurrencies with traditional asset classes will improve the diversification of a retirement portfolio.”
Stephen Kates, CFP and Senior Financial Analyst for Rente.org, agree with this premise. He said investors should dedicate no more than 5-10% of their portfolio to any specific investment and not exceed these thresholds, as most cryptocurrencies have a high correlation with each other.
“Correlation is the probability that two or more investments will move in the same direction at the same time. This may look great when prices rise, but it can be a disaster for your wallet when prices fall,” he added.
It depends entirely on your situation
Cliff Ambrose — FRC and founder/wealth manager at Apex Wealth — argued that when considering the incorporation of cryptocurrencies into a retirement portfolio, the optimal allocation depends on various factors. These include risk tolerance, investment objectives and time horizon.
Yet while there is no single answer, he also said that financial experts often recommend a conservative approach, with crypto allocations typically ranging from 1% to 5% of the total portfolio.
“This allocation can provide exposure to the potential benefits of cryptocurrencies while mitigating the inherent volatility and risks associated with this asset class,” he added.
Other experts have also noted that asset allocation requires a long-term mindset but protects your net worth from short-term fluctuations.
“As a result, what is volatile typically represents a smaller portion of the portfolio than traditional stable investments like dividend-paying stocks and high-quality bonds,” said Vijay Marolia, co-founder of Cash Square. “Because crypto is so volatile, I would recommend people start small and average cost over time.”
Nothing at all?
On the other end of the spectrum, some experts advise against including cryptocurrencies in retirement portfolios, saying they are too risky and akin to speculative investments.
“The answer is simple, zero,” said Dr. Robert R. Johnson, a finance professor at the University of Washington. Heider College of Business, Creighton University. “The crypto market has never been a good place to invest. At times this has been a profitable place to speculate. My belief is “Just say no!” » should guide your actions when it comes to crypto and retirement accounts.
According to Johnson, investing in Bitcoin and other cryptocurrencies is pure speculation.
“Cryptocurrencies don’t produce anything – a fact that Warren Buffett eloquently explained at Berkshire Hathaway’s annual meeting in May,” he said.
Other experts also noted that it was difficult for them to understand why a speculative, unproven asset class would be considered to carry the burden of supporting a multi-decade lifestyle.
In this capacity, Jake Falcon — CEO of Falcon Wealth Advisors – argued that crypto has no place in a retirement portfolio at all.
“Cryptocurrencies should only be considered with assets that are willing to lose completely and are not intended for anything as important as retirement,” he added.
And like Scott Lieberman, founder of Touchdown moneyfurther argued, if you are older and need to protect what you have – because you no longer have the luxury of getting back what you lose – it is better to limit your crypto investment.
“Crypto is a high-risk opportunity, so you have a much higher chance of going to zero than with stocks or mutual funds. If you’re in your 30s, you can handle a loss like that. If you are in your late 50s, experiencing this loss can be a disaster,” he said.
Crypto investments: in what direction?
These days, there are several ways to include crypto in retirement accounts, especially with spot Bitcoin ETFs opening the door to easier access.
A key factor to consider is diversification. Don’t put all your eggs in one basket, according to WinCap’s Collins.
“This could involve investing in different cryptocurrencies, such as Bitcoin, Ethereum and Litecoin, as well as considering other asset types like stablecoins or decentralized finance (DeFi) tokens,” a- he suggested.
“It is also important to keep in mind the volatility of the crypto market and reassess the portfolio regularly to ensure the allocation is in line with the overall financial plan and risk tolerance,” he said. he adds.
When it comes to ETFs, they offer a more diversified and regulated approach to investing in cryptocurrencies. According to Apex Wealth’s Ambrose, this could attract retired investors who are looking for increased security and convenience.
Ultimately, Ambrose said, the decision about the allocation and type of crypto assets in a retirement portfolio should align with a person’s risk tolerance, investment goals and overall financial strategy. individual.
Seeking advice from a financial advisor who understands both traditional retirement planning and the nuances of cryptocurrency investing can help investors effectively navigate this evolving landscape, he concluded.
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