Best performing asset class in 2020 so far

Which asset class do you think has performed the best in 2020 so far?

Stocks? Vanguard Total Stock Market ETF returns ~2% till date.

Long term Treasury bonds? Reasonable choice. iShares 20+ Year Treasury Bond ETF returns ~27% till date.

Gold? Not a bad choice. iShares Gold Trust returns ~30% till date.

However, one asset class has a stellar performance in 2020 so far. And its return is even higher than that of gold.

And that is Bitcoin. Bitcoin has a return of ~70% till date! That dwarfs the performance of all other asset classes in 2020.

I wrote an article earlier about Bitcoin about 8 months ago. Back then, Bitcoin wasn't having a stellar performance in 2019. I highlighted the fact that the Bitcoin halving in 2020 might have a positive impact on its prices (just like all its other halving events in 2012 and 2016). Since its halving in May 2020, Bitcoin already has a growth of ~40% in just 3 months' time.

This leads to increased attention on Bitcoin again lately and some might have even seen Bitcoin as the new digital gold for investing. In this article, JPMorgan analysts are seeing a trend where young retail investors are flocking to invest in digital gold amid this pandemic while the older retail investors are still sticking to the traditional gold. Looking at the situation, you might be thinking if Bitcoin is going to eventually replace gold in most investor's portfolios in the subsequent years.

Well, not so actually. In fact, Bitcoin and gold are not too correlated to each other and hence it's likely one will replace the other in balancing and allocating the right weights in your portfolio.

Below is the table showing the correlation of Bitcoin to other asset classes based on performance from 2014 till now.

(source: Portfolio Visualizer)

From the table, you can see that Bitcoin and gold has a very low correlation of just 0.08. In fact, Bitcoin is more correlated to the stock market with a correlation value of 0.22 than any other asset classes. Even then, this correlation value could still be considered low. With such a low correlation, there is no way you should be replacing your gold allocation in your portfolio with Bitcoin. In fact, what is worth taking a closer look will be to consider including Bitcoin in your portfolio instead of using it to replace gold.

(source: Portfolio Visualizer)

If we look at the Efficient Frontier graph for the various asset classes based on data from January 2015 to July 2020, you could see that the expected return for Bitcoin is way much higher than the expected return of all asset classes. Granted that it is also a much riskier asset with a much higher standard deviation value of >75%. However, if you are familiar with the Sharpe Ratio, you should also be aware that such high returns relative to the standard deviation value actually gives you a much higher sharpe ratio as compared to any asset classes. In fact, the sharpe ratio for a 100% Bitcoin portfolio based on the same time period is an astounding 1.83!

Does this mean that you should now sell everything and buy Bitcoin? Of course not! Like what I have always advocated, balancing and allocating the right weights to your portfolio is the key. While historical performance might give you some indication of how your portfolio could perform, you should never fully rely on past historical results and expect future performance to completely replicate them.

In this case, what would then be worthwhile to explore will be to allocate a small percentage of your portfolio to Bitcoin. And that might make quite a substantial difference to your portfolio.

In an earlier article which I wrote about recession-proof portfolio, I highlighted the performance of the All Weather portfolio (based on allocation to stocks, treasury bonds, gold and other commodities) in the past decade.

Now, I'm going to make some tweaks to the All Weather Portfolio by including Bitcoin in the portfolio. In this case, I will reduce the allocation to long term treasury bonds from 40% to 35% and allocate this 5% to Bitcoin.

For comparison's sake, this is the allocation for each of these two portfolios.

All Weather Portfolio

  • 15% intermediate term treasuries

  • 40% long term treasuries

  • 30% US Stocks

  • 7.5% Gold

  • 7.5% Commodities (diversified)

All Weather Portfolio (Bitcoin included)

  • 15% intermediate term treasuries

  • 35% long term treasuries

  • 30% US Stocks

  • 7.5% Gold

  • 7.5% Commodities (diversified)

  • 5% Bitcoin

Here are the results of the comparison based on data from 2015 till now.

(source: Portfolio Visualizer)

(source: Portfolio Visualizer)

You can see that this mere 5% allocation makes a whole world of difference. The CAGR now almost tripled to 17.84% as compared to 6.38% previously. Max drawdown has a slight improvement from -7.06 % to -6.58%. Sharpe ratio improves to 1.36 from 0.93. All three key metrics show improvement just by merely allocating a very small portion of your portfolio to Bitcoin.

Of course, do take note that this is a simple exercise to show you how much of an impact having a little Bitcoin in your portfolio could do. You might like to change the allocation accordingly to your expected returns or risk appetite. Every individual has a very different opinion on risk and returns, and hence you will need to exercise your own judgement when allocating and balancing your portfolio.

Till the next time. Stay balanced.

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