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Bitcoin’s sharp drop in value in May is a perfect case study of the risks associated with crypto investing. Cryptocurrency is still an extremely volatile investment, prone to big swings in short timeframes.
Still, everyday investors are crypto-curious. Some of the most visible financial influencers are also starting to talk and think about crypto more. Tori Dunlap of Her First $100K recently told us that she still errs on the side of caution and tells people to follow the 5% rule – that is, don’t contribute more than 5% of your portfolio to risky assets like crypto.
“I think it is really important to consider that these things are still speculative,” says Dunlap, who saved her first $100,000 by age 25 and is on track to have $6 million saved by the time she retires. “If you are investing a certain amount of money, you should maybe be OK losing that amount of money.”
As with any new investment, it’s important to do your research, and understand all of the risks. Experts say you shouldn’t invest in crypto if it means you can’t meet other financial needs, like paying off debt, building an emergency fund, or maxing out other retirement accounts. And just because crypto is new and interesting doesn’t mean you need to invest in it at all — people have been successfully saving and investing for retirement since long before crypto was around.
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.”