[Bithumb Easyconomy] Emergence of the “60–40” investment including Bitcoin
“Cash is trash.” This is what Ray Dalio, co-chairman of Bridgewater Associates, the world’s biggest hedge fund, said during the Davos Forum held in January last year. His point was that currency values are plummeting because many countries are increasing money supply for liquidity. At the same time, it was a warning that having cash alone cannot make you wealthy any more. Dalio’s view became more persuasive after the outbreak of COVID-19. As COVID-19 paralyzed the global economy, central banks of many countries started to speed up liquidity provision, causing asset prices to soar. The perception that having money in the bank is too risky became widespread among people.
With this, the “digital gold” Bitcoin came back into the spotlight. COVID-19 added fuel to its rapid growth. On top of this, the recent NASDAQ listing of the global cryptocurrency exchange Coinbase helped set the new record of 65,000 dollars. Bitcoin’s skyrocketing value reflects that more and more people are considering cash less valuable.
Cash is risky? What we should do
People are now contemplating what to do with their cash. There are so many investable real assets such as real estates, stocks, and gold everywhere. The question is which options can earn you a high profit and protect the money at the same time. Many people tend to emulate famous investors or well-known investment portfolios. That is because they expect that they can minimize the risk even though those portfolios do not result in high profit rates despite being already verified to the certain extent.
Among such investment methods, the most common one is the “60/40” investment. It is a method where the investor allocates 60% of the entire portfolio to high-risk and high-profit assets and the remaining 40% to low-risk and low-profit assets. The advantage of this method is that growth and stability can be assured at least to the certain extent. In the US, investors using this method usually invest 60% in stocks and 40% in bonds. In fact, the 60/40 method brought quite impressive profit rates to many investors. For example, the S&P 500 Index and the US Treasury bond together recorded an average annual profit rate of 8.9% from 1926 to 2019. It is much higher than the current level of deposit and savings rate of banks. If boosted by the magic of compound interest, this method becomes even more effective.
60/40 investment, how is the prospect?
However, success of this investment method comes with a condition. It is that high profit rates need to be maintained in the future. About this, however, many seem to be skeptical. It is because the US Treasury bond rate has stayed low for a long time. For this reason, securities market experts are advising to reduce the proportion of government bond in investment. JP Morgan forecasts the annual average of profit rate from 60/40 investment for the next 10 years to be no higher than 3.5%. The profit rate of 10-year US Treasury bond sunk from 9.5% in 1989 to less than 3% in 2018. Last year, the rate dropped below 1% due to the stagnation caused by coronavirus. Although the Treasury bond profit rate slightly increased in expectation of economic recovery after vaccine supply, it is nowhere close to the previous levels. It is also quite likely to fall again due to intervention of the central bank.
However, there is a solution. You can swap the stock and bond proportions or assign a new asset. Skeptics of Treasury bond investment are turning their eyes to real assets like gold and silver. Gold is an attractive investable asset to anyone. It was used as currency in the past and is still used in daily transactions, recognized as a rare metal asset. The continuously rising gold price reflects its value. In 1791, gold was worth 20 dollars per ounce, and the price increased to 1,700 dollars per ounce in 2020, showing a stable growth. Growth of silver has been as strong. Silver is used for solar panels and various home electronics, having a significant influence on the global industrial supply network. Jeffrey Currie, the Global Head of Commodities Research at Goldman Sachs, even said that he prefers investing in silver to gold.
Many are viewing that investing in gold or silver instead of government bond will result in higher profit rates.
Then what about Bitcoin?
However, the current market status shows that gold is not as popular as it used to be. The gold price, which had been growing rapidly after the COVID-19 surge last year, even showed a decrease this year. Why? Gold is considered a safe asset and thus less favorable when there is sentiment in high-risk asset preference. Also, Bitcoin is emerging as a replacement of gold contributed to lowering of the value of gold.
Then, will it be okay to replace real assets such as government bold and gold with Bitcoin in the investment portfolio? This idea is not new. The suggestion from Aleh Tsyvinski, Professor of Economics at Yale University, is one such example. In a research paper published in August 2018, he advised to invest 6% of the portfolio into Bitcoin. Even if reluctant about Bitcoin, one should at least allocate 4% to Bitcoin, he advised. Around the same time, Mark Yusko, the founder of Morgan Creek Capital, actively encouraged Bitcoin investment. He recommended to invest 5% into Bitcoin at the maximum as a risk hedging means. Almost everyone is encouraging investment in Bitcoin without exception. Many believe that it is because of its potential amount of profit that can offset the high volatility.
There is also someone who introduced a 60–40 investment method that includes Bitcoin. It is Ric Edelman, a co-founder of the asset management company Edelman Financial Engines. In January last year, he recommended investors to replace 1% from 60% of their stock investment with Bitcoin investment. That makes 59% in stocks, 1% in Bitcoin and 40% in bonds. Basically, he is advising to invest in this new asset to the moderate extent so as not to affect the total investment.
Financial experts are also saying that the 60/40 method is still effective amid the changes in the global financial environment. However, they do stress the importance of being flexible rather than always sticking to the proven formulas. This method can be especially suitable for those who do have interest in digital assets but are hesitant to invest at the same time. That is because this method can achieve both high profit and low risk. Are you doubtful about the profitability? Then, consider this. When Ric Edelman encouraged 1% investment, the Bitcoin price was no higher than 10,000 dollars. Now Bitcoin is worth five times more, and in the meantime its S&P 500 Index rose by 30%.
*This research and analysis material was produced for the purpose of providing reference information based on reliable data and information. However, its accuracy or quality is not guaranteed.
*This material reflects personal opinions which may not be consistent with the company’s official views.