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Cryptos are still very correlated with Equities for now. But what are the less correlated stuff?

I think one of the possible advantages of Bitcoin that will float into your brain is that if it behaves like Gold, then it can act as a diversifier.

It can also reduce the volatility of your portfolio since gold has a very low correlation with general equities.

But my observation is… cryptos do not behave like gold.

After the initial plunge, gold tends to do better as an avenue for those who are reallocating their capital to safe-havens.

But we are not observing the same thing based on recent history:

Click to view a larger chart

Here is a chart where I overlay the Nasdaq 100 (QQQ in blue) against Bitcoin (light green) and Ethereum (Orange) and Tail (yellow).

Tail is an ETF made up of treasury bills and S&P 500 put options.

You would observe that when the QQQ fall, sometimes the Bitcoin and Ethereum leads, sometimes it lags, but the correlation is much closer.

The altcoins showed similar behaviour but in certain coins where there is greater development, with greater incentives provided, we see more resilience in their token prices.

Based on my research, there are many strong believers in Bitcoin (even against other crypto assets) so much so that after every plunge there are more and more addresses showing they are holding firm.

So a lot of these moves in the markets feels like a portion of market participants that are either trading price action, speculation or weak holders.

These behaviours are always present in the market and in cryptos, we can see an extension to it.

Everyone has a narrative for their favourite stocks but there are also participants who are in it to try and speculate.

But as of now, if you are looking to add cryptos as an asset class to diversify your portfolio, it will probably have a high expected return but the volatility can be more brutal.

Not everyone can take the volatility.

This past week may have finally drilled something into some of your minds that while you get great returns, individual stocks comes with greater volatility as well.

TAIL is an interesting ETF in that if you are looking for something that is very uncorrelated, then this is it. But if you have 25% of it, I wonder how well your portfolio would have done.

TAIL definitely did well when the market crashed hard but did it do well enough to warrant its position in your portfolio? I am not so sure there.

What are the ETFs that did well this past week?

These are the ETFs that did well for the past week from ETFScreen:

They are sorted by their 5-day return.

The VIX related products made up for the bulk that did extremely well. (VIX is the implied volatility of the S&P 500, and if markets are very wobbly, the expected future volatility tends to shoot up which is good for the VIX).

Then you have a lot of commodities ETFs, which tends to be futures, swap-based ETFs that is a direct play to the prices. Not so much commodity-related stock ETFs.

Then you have Hong Kong, Brazil China Large Cap, China Financials.

This stuff did well now but you might wonder, how do they do in normal markets?

There is a reason a lot of managers do not add commodities to their portfolios. The returns can be really good but they fade for long periods of time. If you have them in your portfolio, just like TAIL, they serve a certain market regime.

If you think the market regime is here for an extended period, then it makes sense.

This means that you need to have a view of the market and be tactical about these allocations.

You can have them in your permanent or all-weather portfolio as a firm 25% allocation, but know that it is a drag on the portfolio as typically that market regime is less frequent.

But if that market regime dominates for the next ten years…..

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Sunday 23rd of January 2022

Just looking at your blog header question & without looking at this blog's contents, off the top of my head:

1. Commodities fund e.g. USCI

2. Gold e.g. GLD

3. Value stocks e.g. VTV (ok ok it's still equities)

4. Fractionalised modern art e.g. (not vested)


Saturday 5th of February 2022

@Sinkie, REITs still have a high correlation with stocks. I preffer traditional real estate. It not only gives lower correlation with financial assets, but what's more important. Since you cannot see property price changes on a daily basis it helps sleep better during downturns :)

I am a big believer in an all-weather portfolio and prefer to mix many asset classes instead of keeping a simple stock/bond ratio.

I wonder why people stick to the 60/40 idea. In my opinion good tactical allocation in 5 types of assets could give at least 1-2% higher return rate. Which over time makes a huge difference. For example: 100k on 8% over 30 years will give 734k of interests versus similar amount on 6% which will gives "only" 405k (I used this calculator )


Sunday 23rd of January 2022

Oh I forgot properties, maybe Reits.

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