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:
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…..
I invested in a diversified portfolio of exchange-traded funds (ETF) and stocks listed in the US, Hong Kong and London.
My preferred broker to trade and custodize my investments is Interactive Brokers. Interactive Brokers allow you to trade in the US, UK, Europe, Singapore, Hong Kong and many other markets. Options as well. There are no minimum monthly charges, very low forex fees for currency exchange, very low commissions for various markets.
To find out more visit Interactive Brokers today.
Join the Investment Moats Telegram channel here. I will share the materials, research, investment data, deals that I come across that enable me to run Investment Moats.
Do Like Me on Facebook. I share some tidbits that are not on the blog post there often. You can also choose to subscribe to my content via the email below.
I break down my resources according to these topics:
- Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
- Active Investing – For active stock investors. My deeper thoughts from my stock investing experience
- Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
- Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
- Free Stock Portfolio Tracking Google Sheets that many love
- Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
- Providend – Where I currently work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works
- New 6-Month Singapore T-Bill Yield in Late-September 2023 Should Stick to 3.75% (for the Singaporean Savers) - September 21, 2023
- A Concentrated, High-Quality Fixed Income Financial Independence Income Strategy Has Enough Uncertainty - September 20, 2023
- Why Do We Save Money After We Reached Financial Independent Status? - September 18, 2023