We’ve talked about rethinking the 60/40 portfolio, but this takes it to a whole new level
Ric Edelman: It's Monday, October 16th. Everyone has been asking why Blackrock, the world's largest money manager, decided to file an application with the SEC to launch a Spot Bitcoin ETF. After all, as the world's largest money manager, Blackrock owns iShares. They've got nearly 600 iShares ETFs on the market.
But Blackrock has never tried to offer a crypto ETF. Why now? Well, for one thing, Blackrock CEO Larry Fink says bitcoin could revolutionize the financial system. He also says bitcoin is a better hedge against inflation than gold.
One big question that everybody asks is not just whether you ought to invest in Bitcoin, but how much of your money you ought to put into it. I've always said 1% of your portfolio. Yale says 3.1%. The CFA Institute says less than 5%. But here's something you probably never heard of. An internal paper by Blackrock economists says that your clients should be investing 85% of their portfolio into bitcoin.
Yeah, you heard me right, 85%. The other 15% should be split 60 over 40 to stocks and bonds. This paper has not been released to the public. You may have come upon it because it's available only to financial advisors like you.
So I'm not going to give you the link to the paper here, but it is a powerful examination of crypto asset allocation. It says in part, quote, “Bitcoin returns exhibit pronounced positive skewness”, unquote. The authors of the paper at Blackrock examined bitcoin returns from July 2010 through 2021. The paper is highly academic in its tone, and I know you hate to read that stuff as much as I do. Here's a short excerpt for you.
Here’s a short excerpt for you: Denote 𝑟 = (𝑟𝐵𝑇𝐶 𝑟𝑒𝑞 𝑟𝑏𝑑) as the vector of continuously compounded returns on BTC, equities, and bonds, respectively. We assume that 𝑟𝐵𝑇𝐶 follows the mixture of Normals process given in equation (1) with the parameters reported in Exhibit 3. So that we focus only on the skew induced by BTC, we assume that continuously compounded returns of equities and bonds, 𝑟𝑒𝑞 and 𝑟𝑏𝑑, respectively, are log normal with the full sample moments in Exhibit 1. In each regime of bliss or normal returns, we set the correlation structure of BTC, equity, and bond returns to the empirical estimates listed in Exhibit 1.
Ric Edelman: Okay. Back to normal conversation. You really want to read a ten page paper like that? Well, go right ahead. I read it and I had to go take a break. Bottom line: the paper says the optimal allocation to bitcoin is 84.9%. Maybe, just maybe, the world's largest money manager knows something you don't know. And maybe, just maybe, this is why they want to release a Bitcoin ETF to enable you to capitalize on this unprecedented investment opportunity on behalf of your clients. Crypto is now available to pretty much every major fund company. There are ETFs, private placements, SMEs, IRAs, proxy stocks, closed end funds.
However you run money, there's a product platform that matches your practice management, so you can easily add crypto to your client portfolios without having to build a new tech stack, without having to retrain your staff, without having to re collateralize your clients. It's an easy way to invest in crypto today. It's as easy as investing in gold or emerging markets funds.
Talk to us at DACFP to learn how at my sister company, the Digital Assets Council of Financial Professionals. We can show your compliance, risk and legal team that they don't need to be afraid of digital assets. We can show your investment committee the array of choices that are now available, and we can show your planning team how to provide the training to you and your fellow advisors so you can responsibly and accurately talk to your clients. Above all, we can show you how to get your CBDA designation, the Certified in Blockchain and Digital Assets, listed by FINRA as a professional designation.
Just contact us at DACFP.
And with these new ETFs now available and more soon coming online, you need to be ready for the sake of your clients and your own practice management. And no, I don't really think anyone is suggesting that you put 85% of your money into bitcoin. Not even Blackrock is saying that, but to do 0%; that is 100% wrong.
What are you doing on October 24th? Come for my new webinar. Bonds are back. That's thanks to the highest interest rates in 20 years. But are you helping your clients make the most of today's opportunities from today's bond yields? Join me October 24th. It's a Tuesday, 1 p.m. Eastern for a special webinar that will show you how to capture yields in today's high rate environment with bond ETFs. I'll be joined by David Brown, the managing director at PIMCO, and we'll tell you the best fixed income opportunities that are available to your clients right now. You'll also get crucial insights into the economic outlook that you can use in your client conversations, and you'll get one CE credit to boot. You can register for the webinar about today's bond yields for free. The webinar is Tuesday, October 24th, 1:00 pm Eastern.