According to CoinDesk, the traditional 60/40 portfolio, a staple of investment strategy since the 1950s, is facing scrutiny in today's economic climate. Originally designed by Harry Markowitz under the Modern Portfolio Theory, this portfolio allocates 60% to equities and 40% to fixed income, aiming to balance risk and growth. Equities typically drive returns during prosperous times, while bonds offer stability during downturns. However, with inflation consistently above 2% since February 2021 and rising interest rates, the effectiveness of this strategy is being questioned.
The U.S. Consumer Price Index (CPI) inflation was recorded at 2.6% as of November 13, marking a 0.2% increase from the previous month. Over the past four decades, declining global interest rates have bolstered bonds, particularly during the post-2008 zero-rate policy era. Yet, since 2021, rising interest rates have led to significant bond drawdowns, exemplified by the BlackRock iShares 20-plus Year Treasury Bond ETF (TLT), which experienced a 54% decline from its 2020 peak to its 2023 trough. As currency debasement becomes a pressing concern, investors are increasingly focused on beating inflation, evidenced by the U.S. 10-year yield reaching 4.4% from 3.6% after the Federal Reserve's rate cut in September.
In light of these challenges, incorporating bitcoin into the 60/40 portfolio is being explored as a potential solution. Data from Curvo, a financial provider, illustrates that a traditional 60/40 portfolio, using iShares Core MSCI World UCITS ETF USD for equities and Xtrackers Global Sovereign UCITS ETF 1C EUR hedged for bonds, would have doubled an initial investment of €10,000 ($10,500) to just over €20,000 ($21,000) since 2014. However, adding bitcoin to the mix significantly enhances returns. Allocating 1% to 10% in bitcoin, while proportionally reducing equities and bonds, results in higher returns, with a 10% bitcoin allocation yielding over €70,000 ($73,000), a threefold increase compared to the traditional setup.
For illustrative purposes, replacing bonds entirely with bitcoin in a 60/40 portfolio results in a staggering 50-fold return, nearly reaching €500,000 ($526,000). This analysis incorporates a year-to-date return of 101% for bitcoin in 2024, contrasting with the average annual performance of the original portfolio. Bitcoin's decentralized nature and lack of a central point of failure make it an attractive diversification option. Unlike tech stocks such as Tesla or NVIDIA, bitcoin's historical performance has consistently outpaced gold, further supporting its inclusion in modern investment strategies.
