Have a Financial Advisor?

 

For many investors, a financial advisor can be an important part of reaching their investment goals. Certified financial advisors are well-versed about the seemingly endless investment options available and can help determine optimal investment strategies as a result. However, even these professionals can have knowledge gaps about new investment options.

Digital currencies are a prime example of a new asset class for which many advisors lack an understanding. The complexity and unique properties of this new asset class can sometimes feel overwhelming to both investors and even the most seasoned financial advisors, which can discourage even an exploratory conversation about digital assets.

If you’re not sure how to discuss Bitcoin or other digital assets with your financial advisor, we’ve done the hard work for you and created a list of questions that can help guide your conversation:

Does my portfolio include exposure to digital currencies? If not, why is that?

Understanding what’s in your portfolio is a crucial first step in your conversation. If digital currencies aren’t already a piece of your portfolio’s pie, it’s important to explore why. Did your advisor consider and decide against them or was this an option that went under the radar?

What are the benefits of investing in digital currencies? What are the risks?

Understanding both sides of the Bitcoin (pun intended) is critical to making an informed investment decision. If it’s difficult to communicate clear answers to these questions, it’s likely a sign that more education is needed before reaching a decision. (We’ve put together a handy list of research down below that can help.)

How well would my portfolio have performed if I had invested a small percentage in Bitcoin five years ago?

Modeling your portfolio in this way is a great way to assess both the strengths and weaknesses of your investment allocation. By taking a historical view, you’ll also be able to see that Bitcoin was one of the best-performing assets over the last decade. Even small holdings would have returned many multiples of the initial investment by now. Over the last five years, portfolios with even 1% of their holdings in digital currencies saw greatly improved risk-adjusted returns. 

Click to Enlarge

* Source: Bloomberg, CoinMarketCap.com. Performance is shown from September 25, 2013 through March 31, 2019. Annualized figures are based on 252 trading days. “Global 60/40” consists of a 60% allocation to the iShares MSCI ACWI and a 40% allocation to the Vanguard Total International Bond ETF. Return attribution is based on the excess returns of the hypothetical simulated portfolios including Bitcoin as compared to the “Global 60/40”. Performance of Bitcoin is based on the daily values from CoinMarketCap.com. THE GLOBAL 60/40 + 1%/3%/5% BITCOIN RESULTS ARE HYPOTHETICAL AND ARE NOT BASED ON ACTUAL RETURNS OR HISTORICAL PERFORMANCE. BITCOIN HAS HISTORICALLY EXPERIENCED SIGNFICANT INTRADAY AND LONG-TERM PRICE SWINGS AND PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Component asset weights are held constant over the period. The Sharpe Ratio is calculated as the annualized excess return of the portfolio over the 3-month US T-Bill divided by the standard deviation of excess returns. Ratio improvement is calculated by taking the Sharpe Ratio of the Global 60/40 + 1%/3%/5% Bitcoin Portfolios and dividing each by the Sharpe Ratio of the Global 60/40 Portfolio.

Could you explain the investment thesis behind Bitcoin? What about the thesis behind gold?

Bitcoin and gold actually have some important similarities. Bitcoin has been shown to act as a hedge against market volatility much in the same way gold does. However, it’s also important to understand the key differences. For example, Bitcoin is divisible to the eighth decimal place and can instantly be transferred or sent across borders. Understanding the similarities and differences will help you make a smarter investment decision. Want to know more? Check out our Gold vs. Bitcoin blog.

What are the benefits of investments that give me exposure to Bitcoin’s price, compared to directly owning Bitcoin?

Titled, auditable securities like GBTC can give you exposure to Bitcoin in the form of a traditional investment vehicle. As such, it can be held in IRA accounts and other investment accounts, and it alleviates the burden of personally securing your Bitcoin investment. Owning Bitcoin outright comes with its own challenges. It’s important to understand this distinction.

Considering when I plan to retire, will my portfolio benefit from an allocation to digital currencies?

This answer will depend entirely on your portfolio’s current composition and your financial goals. Keep in mind that digital currencies can be volatile, which means they may not be right for investors who need to access returns relatively soon. However, over a long-term period, digital currencies have performed remarkably well and have been shown to be uncorrelated to the stock market, offering important diversification benefits as well as great potential for upside.

I’m a conservative investor; can I allocate a small amount toward digital currencies and see how it performs over time? 

One of the best things about digital currencies is that they are highly divisible, giving investors the option to start small and invest more down the line. If you or your advisor are uncertain about digital currencies, small investments over time can be a more attractive approach to entering this burgeoning asset class.

Continuous education and open dialogue with a trusted financial advisor is a great way to ensure that you’re continually refining a strategy that will help you achieve your financial goals. If you or your advisor don’t know enough about digital currencies but would like to learn more, the following reports should get you started in the right direction.

Downloadable Resources