Which Did More Damage To Your Portfolio Last Year, Bonds or Bitcoin?
The surprising answer
Ric Edelman: It's Tuesday, January 17th. Do you remember what I told you to do one year ago? Yeah, you don't remember. But I do. Because I was right. I told you one year ago to get out of bonds. I sure hope you did. The Federal Reserve raised interest rates more quickly last year than at any time since the 1980s. And the result was that bonds ended up having their worst year ever.
The 10-year Treasuries lost more money last year than in any year since 1788. Treasuries, in fact, not only lost a lot of money last year, but they also lost a lot of money the year before that. Two years in a row, the bond market fell in value. The last time that happened was 1959. The Bank of America Municipal Bond Index, that wasn't safe either. Muni bonds lost 13% last year.
I’m guessing that you didn't have all your money in bonds. You probably only had 40% of your money in bonds. That's a 60/40 portfolio, 60% stocks, 40% bonds. Well, if you had a classic 60/40 portfolio, diversified like advisors tell you to do, you just experienced the worst year for a 60/40 portfolio since 1937. In the last 150 years, there have only been four times where both stocks and bonds fell in the same year: 1941, 1969, 1987 and 1994, and now 2022.
Now you might be saying, “Hey, Ric, ok, yeah, you did tell me to get out of bonds, but you also told me to buy Bitcoin and it lost 77%.” Well, I just got two things to say. First of all, Bitcoin can recover, your bonds can't. The only way for bonds to recover is for interest rates to go way back down to where they were down to 1%. That is not going to happen. But Bitcoin can and likely will return to its previous highs and set new all-time highs. Second, I'm going to say something that will shock you. You lost a lot more money in your bonds last year than you lost in Bitcoin. How could that be? I mean, after all, bonds fell 13%, Bitcoin fell 77%. So how did you lose more money in bonds than Bitcoin?
Well, here's how. If you followed my advice, you only had 1% of your portfolio in Bitcoin, but you probably had 40% of your money in bonds. Let's say you started last year with $100. That means you had a dollar in Bitcoin. You lost $0.77. But if you had $40 in bonds, 40% of your portfolio, that means you lost $5.20 - seven times more than you lost in Bitcoin.
See with a 60/40 portfolio, you started with $100. You ended the year with just $83 because of the losses in stocks and the losses in bonds. But if you had done what I told you to do, sold your bonds and had 1% in Bitcoin, you wouldn't have had just $83 last year. You would have had $88. You would have done about six percentage points better.
And so what am I telling you now for 2023 that you should be doing with your portfolio? Well, rates are still going up, and that means bond prices are going to keep going down. It's iffy, but doubtful if prices are going to end the year higher or lower in the bond market. You will get a bit of a higher yield these days. You can buy a 10-year Treasury now that's paying 3.4%. But if you wait a few more months, you'll probably get closer to 4% in interest. And corporate bonds are paying even more than that, 5%, 6%.
As for stocks, volatility is going to persist for a while. Nothing would surprise me. Prices dropping 20% or prices ending the year up 20%. If you're going to own stocks, you need to be ready for a wild ride and stay focused on the long-term. If you lack the stomach or the time, you shouldn't own stocks or stock funds today. It's really that simple.
And how about real estate prices are going to fall further, perhaps a lot further as the recession kicks in. If you're a seller, sell now. Lower your asking price, by the way, because your house is not worth what it was worth a year ago. And take the offer that you get. If you're a buyer and you can wait, then wait or offer less than what the seller is asking. But don't be silly about it. Be reasonable. Prices need to come down 5% or maybe 25%, but not 50% or 80%.
The Price of Bitcoin in 2.5 Years?
And what about crypto? Well, crypto is like the stock market this year. Volatility is going to persist. But at the end of the year and certainly next year, we'll see sharply higher prices. I'm expecting Bitcoin to be as high as $150,000 by the summer of '25. That would be a 10 X return in about two- and one-half years.
Stocks are going to return maybe one quarter or one half of one X in that same period of time. Compare that to 10 X. But crypto remains very risky and so I continue to say that you should limit your allocation to low single digits and be prepared to lose whatever you invest. And I'd emphasize investing in both bitcoin and Ethereum or a diversified fund like the Bitwise 10 Crypto Index Fund (symbol BITW.
In short, as you well know, 2022 was an awful, terrible year. But everything we faced last year; we're still stuck with. So as we go into this year, remember, perhaps more than ever, that investing is not for the faint of heart.