In 1981, this Treasury paid you 15.68% annually. By 2001, returns had fallen as low as 4.37%, and now in 2021, we are seeing a return of around 1.51%.
For this reason, many institutions including JP Morgan, Morgan Stanley, and Bank of America have declared the death of the 60/40 rule. According to one well-known analyst at JP Morgan, over the next decade if investors stick to the 60/40 rule they can enjoy mere returns of around 4.2%.
He says: “Strong returns from equities and high-quality bonds through the pandemic have left valuations stretched. A traditional 60/40 portfolio of global stocks and U.S. bonds presents a very subdued frontier of potential returns.” He goes on to say” Because of this, a plain vanilla 60/40 portfolio of global equities and U.S. bonds is now projected to provide an annual return of just 4.2% over the next 10 to 15 years compared to 5.4% a year ago.”
The inflation target of most of the developed world’s central banks being 2%, which means your net returns would be 2.2%.
This means that for higher returns you will need to take more risks. So you might want to diversify those risks, as opposed to piling into stocks only.
Further Diversification as a Risk Management Tool
The above, and the rise of a new and easily accessible asset class, makes reconsidering the balance of their portfolios critical for investors.
A good balance will mean a diversified portfolio that allows you to effectively weather any storms as you are holding assets from different classes, countries, and industries. So if big tech crashes, you will be exposed to other asset types that might not be so affected by the same drivers. It is also better if it allows you to sleep at night and does not get you overly worried.
Amongst the asset classes that are not stocks and bonds, you will find art, cars, wine, commodities like gold or copper, Hedge Funds, real estate, and also crypto. They can pretty much all be purchased directly or - if you would rather diversify more easily - through funds.
Crypto, like real estate, is something that is made up of a lot of different types of assets. Store-of-Value (like Bitcoin), decentralised networks on which to rebuild the internet (such as Ethereum, Cardano, or Polkadot), or decentralised software startups such as decentralised exchanges (like Uniswap), or decentralised data companies (like Chainlink). And all of those endeavours are pretty young. Bitcoin is the eldest, and it was only created in 2009.
In that regard investing in Crypto is a little like being a venture capitalist. You could even aim to build a portfolio like some of them, such as Coinbase Venture’s or Pantera Capital’s.
Corporations Get it
Many savvy investors are holding Bitcoin. This includes leading banking institutions and corporations.
Michael Saylor, CEO of MicroStrategy has recently again increased the company’s holdings in Bitcoin. Saylor tweeted that they currently hold 91,579 BTC.
Square Inc. in October 2020, invested $50 million in Bitcoin, before increasing this by a further $170 million, early 2021. Tesla made the news in February 2021, by investing $1.5 billion in the cryptocurrency.
And it’s not just Bitcoin. Ethereum is having more than a moment as Decentralized Finance (DeFi) apps are showing that it’s usable.
Ethereum now represents over 25% of crypto investments by institutional investors. A CoinShares report from 1 June 2021, shows that investors are moving funds from Bitcoin to Ether. Over 63% of inflows from institutions are now in ETH products according to this report and Ether products represent 27% of the total AUM for crypto investment products.
Portfolios for a new world, not your parent's portfolio
When it comes to deciding how much Bitcoin, Ethereum, or other Crypto to own, there are several ways to look at it. Let’s look at just a few.
The Black-Litterman Model
Dating back over 30 years, this mathematical model was invented by two members of the Goldman Sachs team, Fischer Black and Robert Litterman.
In broad strokes - because you are not managing billions of other people’s money and don’t need the exact math - the model starts with the world as it stands today, and then lets you include your vision as to how the world might develop. And if you don’t know, you can always go with the default.
So you start by working with an allocation based on the weight of every different asset class in the world (like an indexing system) and your opinions are what moves the needle. If you don't have opinions on any asset classes, then this represents your portfolio.
Here's an example of using the Black Litterman Model for building a portfolio:
At the start of 2021:
The world’s stock market was valued at $95 trillion
- 39% is the USA
- 10% is EU
- 30% is the rest of the developed markets (R.O.DM)
- 21% is the remaining emerging markets (EM)
The world's bonds market was worth $105 trillion
- 39% in the USA
- 21% in the EU
- 24% rest of the developed markets
- 16% in the emerging markets
The Crypto market was valued at about $1 trillion, which means that cryptos would represent 0.50% of the entire portfolio.
Data taken from here and there.
So your starting portfolio is the following: 47% of stocks, 52.5% of bonds, and 0.5% of Crypto.