‘We are teachers with no pensions – but £900,000 in Bitcoin’

Thank you,

T

Victoria says:

Dear T,

Your portfolio, made up of just Bitcoin, ether and cash would give most financial advisers a heart attack.

To me it looks like a ticking time-bomb leaving you in danger of losing that hard-earned wealth unless you take drastic action as soon as possible. 

There’s almost no diversification, no allocation to traditional asset classes like stocks, bonds, or property, and you’ve loaded up on way too much risk. I’m also concerned that you have zero pensions accrued but I’ll come back to that later. 

There’s no denying cryptocurrencies have done extremely well in 2023 with Bitcoin up around 150pc. So I’m sorry to be a party pooper but cryptocurrency markets are subject to wild swings and abrupt reversals.

You don’t have to go far back on the charts to see that gains can be very quickly wiped out in this notoriously erratic asset class – take the sell-off in 2022 as a reminder when Bitcoin’s value ended the year at around a quarter of where it started.

I would hate to see your wealth slashed like that, especially as your retirement years approach. 

Fortunately, this year’s crypto bounce means now isn’t a bad time to sell your Bitcoin and ether so you can build up a secure, resilient, and sensible portfolio instead.

I’d start by focusing on some “core” building block funds across equities and bonds, making up the lion’s share of your portfolio.

These will provide geographical and asset class diversification to help spread your risk and protect your wealth. Then if you want to have some fun with a much smaller allocation to riskier assets that take your fancy, such as crypto, or some higher-risk equity funds then that’s your call.

With an allocation of around 40pc, you could invest in some core equity funds covering the world’s major investment economies such as the US, Continental Europe, UK, Japan, and a smaller allocation to riskier emerging markets.

You can do this by selective individual tracker funds such as Fidelity Index UK, Vanguard US Equity Index, HSBC Japan Index, Vanguard FTSE Developed Europe ex UK ETF and Fidelity Index Emerging Markets.

All of these are components of our interactive investor Super 60 recommended funds list. But if you want to keep things even simpler, you could go for a one-stop-shop equity fund such as iShares Core MSCI World Ucits ETF or Vanguard LifeStrategy 100% Equity.

I would then think about an allocation of around 40pc to bonds. There are three reasons to be optimistic towards fixed income in 2024.

First, inflation is falling which will hopefully allow the Bank of England to cut rates. Lower rates are good news for bond prices as the value of existing, higher yielding debt increases when interest rates fall, and new bonds offer lower yields.

Secondly, after many years, bonds offer attractive income. With the “yield to maturity” on gilts at around 4pc and sterling corporate bond yields at about 6pc, you’re finally getting paid well to hold bonds, making their returns rival those in the equity market.

Thirdly, bonds are a good hedge against stock market volatility and turbulent economic times. In terms of what to buy, I’d highlight the Vanguard UK Government Bond index for broad exposure to gilts and Rathbone Ethical Bond for a diversified actively managed portfolio of sterling corporate bonds.

But if all of that still feels too complicated, you could put most of your wealth into one fund within the Vanguard LifeStrategy range, either 40pc or 60pc equity. 

These funds combine multiple individual index funds into one portfolio, giving you access to thousands of shares and bonds in one investment, providing built-in geographical and asset class diversification.

The only difference is the proportion allocated to equities versus bonds, which you would choose depending on your risk appetite.

At the moment, you’ve got about 12pc of your portfolio in cash. Typically we’d suggest having enough cash set aside to cover around six months of living expenses, or 5pc of your portfolio at least. 

So you might like to put more of your cash to work in your investment portfolio to potentially improve returns, or stick to a more conservative approach – that’s up to you.

In terms of your cash allocation, I hope you’ve shopped around for a decent savings rate because there are plenty of attractive offers on the market. If not, think about putting it to work in a way that will at the very least offset inflation.

The Royal London Short Term Money Market, which is somewhere between a savings account and a bond market investment, is something to explore. It has an inflation-topping yield of 5.3pc, it’s very safe and is extremely popular as a result.

Looking ahead to retirement, since you have neither pension nor property assets, you’re going to have to generate your retirement income almost entirely from your portfolio.

This is another seriously important reason to shift away from crypto, so you don’t risk losing this wealth. I’d start thinking about dividend funds and bond funds that will generate a decent income for you when the time comes. 

And if you can begin to set aside some money each month to go towards your pension, that would be a good idea too – it’s never too late.

But let this be a reminder to younger investors of the importance of starting your pension contributions as early as possible so you can grow your pension pot and enjoy the benefit of compounding on your investments. 

With triple-digit percentage gains for Bitcoin this year, it’s very easy to see the appeal of cryptos. But it can be harder to remember that there are serious risks involved that could jeopardise your wealth.

Just think how devastating it would be to see your portfolio value fall sharply. Is the potential upside really worth that risk?

Try to focus on building a reliable and stable portfolio rather than one which is volatile and unpredictable. Good luck.

Victoria is head of investment at Interactive Investor. Her columns should not be taken as advice or as a personal recommendation, but as a starting point for readers to undertake their own further research