Power of combining asset classes

Combining Bitcoin and Gold for Balanced Returns

There is an interesting strategy that involves combining two different asset classes—Bitcoin and gold. This strategy shows how these two assets can work together to create a balanced investment portfolio. While each of these assets behaves differently on its own, combining them brings stability and helps smooth out returns over time. This approach can also be applied to other asset combinations like stock indexes and gold.

Individual Performance of Bitcoin and Gold

In this particular study, Bitcoin surged by 623%, while gold only went up by 62% over a few years. Bitcoin’s high volatility, at 67%, makes it a riskier investment, while gold’s volatility is much lower at 15%. The maximum drawdown, which measures the biggest loss during the period, was 76% for Bitcoin and 20% for gold. Despite the differences, both assets can play a role in a strategy that balances risk and reward.

The Power of Combining Assets

When these two assets, Bitcoin and gold, are combined in a portfolio, the results become more stable. A specific strategy that rebalanced both Bitcoin and gold resulted in a combined return of 203%. The annualized volatility of this combination was a much lower 24.9%, compared to Bitcoin’s 67%. The maximum drawdown was also reduced to 39%. This shows that combining a highly volatile asset like Bitcoin with a more stable asset like gold can help balance the overall risk.

The Benefits of Rebalancing

One of the key elements of this strategy is rebalancing. By regularly adjusting the proportions of Bitcoin and gold in the portfolio, the investor can smooth out returns and reduce risk. Rebalancing helps capture gains from the more volatile asset (Bitcoin) and locks in stability from the less volatile one (gold). The result is smoother returns over time without the need to guess whether one asset will outperform the other.

Applying This Approach with Nifty and Gold

A similar strategy can be applied using a stock index like Nifty and gold. By combining a Nifty ETF and a Gold ETF in a 50-50 ratio, and rebalancing on a regular basis, the returns become steady. Though the returns may be lower than a high-risk stock portfolio, this strategy still delivers good, stable results over the long term. It can perform better than other safer options like debt funds or keeping money in the bank, making it a strong alternative for cautious investors.

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