What Would a 60/40 Portfolio Look Like If We Swap Bonds for Bitcoin?

It may be time to re-evaluate the robustness of the 60/40 portfolio, created in the early 1950s and often referred to as “Modern Portfolio Theory.” The theory was created by Harry Markowitz, who tried to optimize a portfolio in terms of risk reward.

The traditional 60/40 portfolio is split between stocks (60%) and fixed income (40%). It is designed to make the portfolio diversified and balanced and to manage both risk and growth simultaneously.

US Consumer Price Index (CPI) inflation remains far from the Federal Reserve’s targeted 2% level since February 2021. As of November 13, CPI inflation increased by 0.2% compared to the previous month and reached 2.6%.

Globally, interest rates have been falling for the last four decades, pushing bonds even higher, especially in the post-2008 zero-rate policy environment. However, interest rates have been hurting bonds since 2021, even experiencing their biggest declines. An example of this is the BlackRock iShares 20 Plus Year Treasury Bond ETF (TLT), which witnessed a 54% decline in value from its peak in 2020 to its trough in 2023.

The main aim of the game has become to beat inflation, as currency depreciation has become a major concern for investors around the world.

When we look at data from data and finance provider Curvo, we can see how the 60/40 portfolio will take shape.

Curvo’s pick for stocks was the iShares Core MSCI World UCITS ETF USD in the MSCI World Index. For bonds, he chose the Xtrackers Global Sovereign UCITS ETF 1C EUR, which is hedged in the FTSE World Government Bonds – Developed Markets index. According to these choices, an investment of 10,000 euros ($10,500) made at the beginning of 2014 would have grown to just over 20,000 euros ($21,000), essentially doubling in 10 years. It actually seems like a good return.

So what happens if we add bitcoin to the portfolio?

For analysis, let’s assume we invest in bitcoin at 1%, 2%, 3%, 5% and 10%. A 1% allocation would see a 0.5% drop in both stocks and bonds to keep the split even; which would be the same as the BTC allocation gradually increasing. As you can see, the higher the bitcoin allocation, the higher the return. A 10% bitcoin allocation would provide a return of over 70,000 euros ($73,000), or more than 3 times, compared to a traditional equity allocation.

As a different scenario, if we adapt the traditional 60/40 portfolio to include a 40% bitcoin allocation instead of 60% stocks and bonds, the results add up to around 500,000 euros ($526,000), an incredibly high return of 50x.

In summary, it seems more profitable for bitcoin to act as a diversified asset in a 60/40 portfolio, thanks to its features such as not being tied to a CEO or any central element. The analysis does not include technology stocks like Tesla (TSLA) or NVIDIA (NVDA) for these exact reasons.

One of the reasons why bitcoin was preferred in the analysis was that it provided more annual returns than gold.