There’s a crypto phenomenon in the air. Pair the extreme volatility we’ve seen over the past weeks with reports of investors making significant returns, and you rightly see intrigue and excitement building around this currency.
Despite the potential for substantial gains, crypto currencies remain prone to the scepticism of market manipulation, and it is still a largely unregulated space. Investors considering dipping their toe into the world of crypto would be wise to apply the same principles of risk management as with any other investment product. This means assessing the economic, social and political factors at play that may influence the value of an investment product at any given time.
A sensible approach to crypto investment
Pursuing a diversified, balanced portfolio will better protect you against over exposure to any one asset class. For more volatile asset classes, including crypto, it is important to ensure that the allocation of investment is sensible and that the potential risk of investment is offset by a greater investment in more stable asset classes, including real estate and equities.
By and large, allocating around 7% of a portfolio to crypto is appropriate, as is investing in the currency fractionally. Buying a whole bitcoin can be a rather large exposure for the average retail investor, so a trusted and regulated way to benefit from crypto is to trade it as a currency pair or via an ETP (Exchange Traded Products).
This offers a fractional investment approach that is fundamentally less risky than buying the currency. Additionally, in trading ETPs or Crypto FX pairs, there is no need for a crypto wallet, meaning you don’t own or store the underlying coins. This negates worries about crypto exchange hacks or losing access, which is important as stories of access to cryptocurrency wallets being lost to dramatic effect have been widely reported.
Building the remaining 93% of your portfolio
~Novel Serialisation: Heavens Fire~
- Equity
Equity could make up the biggest component of your portfolio, around 35%. It has historically performed extremely well, especially in the case of the US market with earnings of more than 9%. But be warned: earnings of 9% come with big risk – in February and March this year the market dropped by around 40%. Whilst you’re getting high return, you’re also working with high risk. Be mindful of devaluation as a secondary risk. In today’s market, if low interest rates were to change due to inflation or through monetary tightening, then we’d consequently see a devaluation of the stock market.
- Commodities
Around 20% is appropriate to allocate to commodities. Firstly, because it is classically used as an inflation hedge. Secondly, governments across the globe are promising to spend a huge amount of money on this sector, especially with a view to fulfilling efforts to go green. Moreover, the physical world has become too small to handle the demands of digital e.g., the supply chain demands of digital – so prioritising infrastructure and industrial development is crucial. Commodities has been an overlooked sector, but now is offering lots of promising opportunities to investors, so do your homework before making the most of this asset class.
- Real estate
Diversifying your portfolio with real estate is important, again this usually sits at around 20%. It is another component which has guaranteed ability to keep up with inflation and remain stable as an investment. As an investor, you can enter this market through small ETFs called Real Estate Investment Trusts (REITs) which pool together various estates and give you a dividend yield. If you look at return profiles over the last 30 years REITs are almost always on top. They are inflation-linked so you are protected against an attack from tax and get very good returns given the lack of volatility.
- Fixed income
Around 13% of a portfolio could be portioned to a small component of the fixed income market called Tertiary Inflation Protected Securities (TIPS). With these, the interest gets paid out twice a year reflective of inflation or deflation – so the nominal debt owed to you is adjusted accordingly.
- Volatility
Your portfolio could include exposure to volatility of 5%. This is the protection against the rest of your portfolio crashing, meaning you’re navigating the market as a rational forward-looking investor.
There is no one-size-fits-all solution to investing, and doing your research is vital to ensure you make informed investment decisions. When it comes to volatile assets such as cryptocurrencies, balancing these within a diverse portfolio will ensure you are in an optimal position to reap the rewards, while minimising your exposure to unnecessary risk.
By Adam Smith, CEO of Saxo Markets Australia
Adam Smith is the CEO of Saxo Markets Australia, a leading Fintech specialist and global multi-asset facilitator of capital markets products and services. He has over two decades of experience working in the financial services and technology sectors.
