The steep drop in Bitcoin’s value in May is an excellent example of the dangers of crypto investing. Cryptocurrency remains a very volatile investment, prone to large fluctuations in short periods of time.
Even so, regular investors are interested in learning more about cryptocurrency. Some of the most well-known financial gurus are beginning to talk and think about cryptocurrency more. Tori Dunlap of Her First $100K recently told us that she still advises individuals to err on the side of caution and stick to the 5 percent rule, which means they shouldn’t put more than 5% of their portfolio into riskier assets like crypto.
It’s critical to do your homework and understand all of the hazards before making any new investment. Experts advise against investing in cryptocurrency if it means you won’t be able to meet other financial obligations, such as paying off debt, saving for a rainy day, or maxing out other retirement accounts. And just because crypto is new and exciting doesn’t mean you should invest in it; individuals have been saving and investing for retirement for decades before crypto existed.
So how much is too much, if you are going to invest? We asked five financial advisors to weigh in on what they’re telling clients:
1. Vrishin Subramaniam: 2-5% of your net worth
Investors who are interested in crypto should have between 2 and 5% of their net worth in it, says Vrishin Subramaniam, founder and financial planner at CapitalWe. “Two to 3% is usually what we see for most clients who are not tracking crypto markets more than once a week.”
The risks and volatility associated with cryptocurrency has much to do with its relatively short track record, at least compared to the stock market. Subramaniam advises clients that they can adjust their crypto strategies accordingly as more time passes and we learn more about its performance. But until then, Subramaniam recommends reducing your risk by keeping crypto holdings to a smaller share of your investments.
2. Theresa Morrison: 1 to 4% of your portfolio
“Crypto-aware clients sit in two camps: crypto-savvy or crypto-curious,” says Morrison. “For the crypto-curious, a 1% diversification can be a way to explore [crypto].”
For the crypto-savvy, think about your asset allocation and diversification strategies in a similar way as you would with your traditional portfolio, says Morrison. Crypto should be considered an aggressive asset. “The holistic picture of both is the important one. What’s the impact on your net worth?”
But generally speaking, Morrison recommends keeping any crypto investments below 5% of your portfolio. “Once it’s over 5%, you start to see the volatility swings affect the rest of the traditional portfolio, and most people don’t want that,” says Morrison.
3. Dan Herron: Up to 1% of your assets
“With my clients that are interested in learning more about crypto, I tell them that they can have up to 1% of their assets in cryptocurrencies, and the remaining 99% in more traditional assets. However, as they become more familiar with the crypto space, we can gradually allocate more to that allocation,” says Herron.
But again, don’t exceed 5% right now, Herron says. The crypto market is still too young to warrant a bigger allocation in an investment portfolio.
4. Ryan Sterling: No more than 3% of total liquid assets
Crypto can be a good opportunity to diversify your portfolio, says Sterling, founder of Future You Wealth. But still, keep your allocation below 3%.
“I am using crypto as part of client allocations but limiting exposures to no more than 3% of total liquid assets,” says Sterling.
5. Michael Kelly: 1-2%
“Depending on the client’s unique risk return profile, I see that a very minimal allocation, 1 to 2%, can be a potential opportunity,” says Kelly. “I view it as a valid asset class in a portfolio due to its lack of correlation with the traditional investments of stocks and bonds.”
For Kelly, crypto’s volatility and unique characteristics also present an opportunity. “Although it is high volatility, the lack of correlation reduces the overall portfolio volatility and provides the potential to have significant upside for returns. Having just a small allocation in a portfolio can have massive return potential with minimal downside risk.”