Bitcoin Found a Happy Match in the Traditional 60/40 Portfolio
Bitcoin’s spectacular rallies and crashes have investors scratching their heads about whether it fits in a balanced portfolio. History shows a 60/40 allocation to stocks and bonds could be improved by some exposure to the digital asset, despite the risks.
So what happens when investors take the plunge?
Tweaking a global portfolio of stocks and bonds to also include the digital currency at the start of 2015 would have seen annualized monthly returns increase, with bigger gains the more money is allocated to crypto. That’s not a major surprise, since Bitcoin rose more than stocks or bonds. But just a 5% allocation would have seen gains to the investor 1.7 times bigger than using the standard mix.
The catch is that this also introduces Bitcoin’s 30-day annualized volatility of 81%. With just a 5% allocation and despite a low correlation with other assets, the volatility in the overall portfolio rose by 1.7 percentage points, based on a monthly-rebalancing rule. That’s a big price to pay in a market obsessed with the tradeoff between the size and predictability of gains.