Investment legend Jack Bogle said in a speech in 2009: “We must base our asset allocation not on the probabilities of choosing the right allocation but on the consequences of choosing the wrong allocation.” That’s a very practical approach to asset allocation.
The most important point to note is that when we make a loss it’s not because we make bad choices but because we make choices out of panic, greed, fear, or psychological pressure.
In the technology space, diversified asset allocation is even more important. VCs allocate their capital in a diversified manner across multiple assets, investing in hundreds of companies. One or two become unicorns. A few will generate modest returns and most will fail. Yes, most fail. As retail investors, we need to take this principle of diversification to heart when investing in digital assets. We will discuss several ways of diversifying so we have safe returns but don’t miss out on the unicorns. Preserving wealth is most important – only when that is covered should we prioritize growing wealth.
Think like a university endowment, a trust, or a pension fund – all aim to preserve wealth first and then grow it. That is why they are so big today. Nobody can time the market, so either you have strong research backing or a strong sense about a particular stock, or you have a well-diversified portfolio. Be in different asset classes. Buy assets from the angle of strengthening your portfolio and not just on your prediction that the price will increase. If you are aggressive and want to capture the opportunities emerging in the technology space, allocate 15–20% of your total portfolio to technology in whichever form you choose. The total portfolio can be 40% bonds, 30% non-tech stocks, 10% gold, 10–15% tech stocks, and 5–10% digital assets. Also, aim for a less concentrated portfolio in digital assets; otherwise, you will carry too much risk. Make a balanced portfolio.
The allocation depends on individual risk preferences and investment goals, but assuming preservation of wealth as a priority and then a steady growth of wealth, I suggest not over 5 to 10% in digital assets, as shown in Figure. Given that digital assets is an ultra-high-risk investment class, it is best if very conservative investors stay away from this asset class. On the other end, investors seeking a high-growth yield are still not advised to allocate over 10%. Moderately conservative and balanced investors – depending on their risk profile – can allocate between 2 and 5% to the digital asset class. The best is to be all-seasons-proof, to be able to absorb shocks and have the potential to gain on some. Millennials – below the age of 25 – can allocate maybe 10% into this asset class, while people close to retiring should not allocate over 2%.