How high-risk platforms affect financial planning

Dubai - Higher risk means higher reward - so be very careful

Traditional financial planning tools talk about securing incomes, saving for a rainy day and investing for aspirations.
The modern world gives a lot of importance to risk investments as a part of financial planning portfolio. The word investing is the key here. Risk investments are mostly aspirations. They do not ensure or insure to fulfill a future need but surely they can conditionally ensure great rewards to serve our aspirational portfolios. With all the fancy investments like in designer real estate, serviced apartments, resorts, exotic cars, exotic car number plates, Web URLs, the newest in line is cryptocurrency. Marked with an exponential growth (350 per cent) in one year, bitcoin has become the talk of the town since last year. Investment savvy people would have read everything about this shinier than gold currency and many have invested in it as well. Using cryptocurrency (read bitcoin) as an investment portfolio is becoming mandatory day by day.
Quoting an article from coindesk.com: "An industry group representing certified financial planners has found that bitcoin can be a beneficial addition to investor portfolios."
In the new report, the Financial Planning Association (FPA) asserted that for many investors, bitcoin represents a potential opportunity that could both diversify and boost the efficiency of a portfolio. Digital currency investments are high-risk mainly due to the enigmatic aura that they carry around them and their super fast performance. They are too good to be true sometimes.
 
Risk vs rewards
A common mantra of investments is the higher the risk, the higher the reward will be. If cryptocurrency has managed a whopping growth of 350 per cent in a year then surely we all understand that it has an equally possible downward risk. A study compared bitcoin to currencies like the US dollar, Japanese yen and Swiss franc, as well as assets like gold, property, stocks and bonds. The results suggested that in the context of portfolio management and financial planning, bitcoin may present a welcome, though risky, opportunity. Bitcoin has a low correlation with the performance of other non-currency asset classes. Additionally, none of the other asset classes appeared to have an impact on the price of bitcoin.
There are some other risks associated with bitcoins. Platforms for buying and selling bitcoins are subject to hacking. If you lose your bitcoins or a wallet gets hacked, there is no recourse from any government or banking institution. It is not a legal tender in any nation. It is neither issued nor insured by any government or institution, and is not stored, collected, or secured by any bank or financial institution. Bitcoin transactions are irreversible. Once it is done, it is up to the recipient of the money to refund or return any funds sent in error.
Given the risks involved, no one is explicitly endorsing bitcoin as worthwhile investment. Instead, the digital currency does have a place in investment if handled correctly. One can invest to win with the money he/she will not need in future. Money kept aside for child education or for retirement must never be invested in bitcoin. But sure the money that is kept for your future aspiration like buying a second home or buying a luxury watch or any money that is not meant to serve your future basic need and your lifestyle will not get effected in its absence, can be invested in digital currency. If the value of cryptocurrency increases, your aspirations can be taken care of exponentially.
 
Experts say invest small
Despite the possible risks and benefits, one cannot discount the role of high risk investment in their portfolios. Five to 10 per cent of our portfolios generally have 100 per cent risk products. Investing in bitcoin should not be taken lightly, and one should limit their exposure to digital currency holdings. As a financial planning expert, I completely vouch for this statement and would recommend small doses of risk at different stages of life. Like any other market dependent investment in shares, property or even in some business, returns are not guaranteed, so is the investment in bitcoin. So go gradual and go small.
 
Buy or trade
Trading is more lucrative as some platforms even allow a leverage ratio of one-to-five. Bitcoin in itself has daily fluctuations of around 10 per cent positive and 10 per cent negative on same day. A total of 20 per cent fluctuation along with a one-to-five leverage allows any smart and lucky investors to earn up to 100 per cent in a day. Such extreme scenarios can lure an individual towards trading. But trading is the most risky of for any kind of investment and it requires a different kind of investment attitude and appetite. Only six to eight per cent of traders actually make money while others lose.
Buying and keeping some bitcoins for some years is a wiser idea. One must buy from an authentic source though.
At some point or other we add risk to our portfolios. Bitcoin is a high-risk investment. It can be used to add a zing to our portfolios but it should only be proportionate to the money that you will not need in future and you are willing to take the risk.
The writer is an entrepreneur and financial planning consultant. Views expressed are her own and do not reflect the newspaper's policy.