Question

John, your 42-year-old client, understands the importance of diversification and takes your recommendation on his portfolio asset allocation. But, he also asks you to put $10,000 worth of Bitcoin in his portfolio as he believes cryptocurrency is the future. How would you respond to his request? Give John your best and most professional answer.

Answer 1

Diversification is important for a portfolio. It is crucial to have different asset classes in the portfolio so that the overall risk is reduced.

However, it is also very important to track the weightage of each asset class in the portfolio. Allocating too much weightage to a volatile asset class can actually increase the risk of the portfolio.

If John wishes to put $10,000 in Bitcoin, it is first important to determine what percentage of the portfolio this $10,000 represents. If it is less than ~5%, then it is recommended to buy Bitcoin for Johns' portfolio. However, if is more than 5%, then John's decision should be reassessed, and he should consider investing a lower amount in Bitcoin.

Furthermore, it is recommended to avoid lump-sum investing and try to invest systematically over a long period (as far as possible) to avoid timing risk. John's $10,000 allocation to Bitcoin should possible be invested in increments. For example, $1,000 could be invested each month over the next 10 months.