I received this email from my colleague, Bill, in November 2019 with this subject: ‘Don’t miss the boat for the 4th? 5ht time?‘

In this email Bill is basically begging me to take buy Bitcoin. He recommends investing $20,000 at a minimum. Me being the respectful, considerate person I am I responded like this

In summary I told Bill to go pound salt because, in my opinion, bitcoin was basically a useless, worthless fool’s gold and had no intrinsic value and therefor no reason to exist.

Meanwhile, having the benefit of hindsight I now know that the $20K Bill asked me to invest last year would be worth over $66K today if I had appreciated his recommendation.

That’s a 231% gain.

Clearly I made a bad call and allowed my ignorance and personal biases to obscure a real opportunity to make a lot of money.

In this video I want to rewind the clock to November 14th 2019 and use Modern Portfolio Theory to create an investment strategy that limits my losses but still allows me to capture some of that amazing crypto-currency upside profit.

So stick around because today we are going to create a real Frankenstein portfolio that I am calling, The Boglehead Core Coin Strategy.

ASSET COORELATION

We know that we want bitcoin in our portfolio but we need to do this in as safe a way as possible. We know from Modern Portfolio Theory that adding small amounts of very volatile assets can actually reduce the risk of our entire portfolio.

We need to make sure that whatever is in the portfolio we are adding bitcoin into is neutral or negatively correlated with bitcoin since you get the best risk reduction from non-correlated assets.

Above is a correlation report for the S&P500 and the Grayscale Bitcoin Trust. The grayscale trust is just a bitcoin derivative that provides a way for institutional investors like pension funds and endowments access to bitcoin. We can see there is essentially no correlation between these 2 assets. Technically anything above 0 is positive but this is low enough for us.

Look at that annual standard deviation… wow; that pretty much says everything you need to know about whether you should ever consider investing in Bitcoin on its own.

THE PORTFOLIO

I think the best portfolio to slot bitcoin into is Rick Ferri’s Cour Four

You’ll remember from episode 4 of Portfolio Analysis that the Core Four portfolio consists of 4 asset classes:

• 48% US Stocks Index
• 24% International Stock Index
• 20% US Bond Index
• 8% US Real Estate Index

Our Frankenstein portfolio the Core Coin is going to be made up of:

• 48% US Stocks Index
• 24% International Stock Index
• 20% Long Term US Treasuries
• 8% Bitcoin

Backtest results

The backtest is from January 2015 to November 2020.

The first value that really sticks out to me is the standard deviation of our Core Coin portfolio. Remember that BitCoin on its own had a 150% standard deviation. Swapping out the real estate for bitcoin only added 7 percentage points of risk.

This minor asset swap increased our annual return from 8% to 26%! That’s just amazing. Worst year is just 12% vs. 6% for the original core four. Check out that max drawdown. Our bitcoin holding portfolio actually suffered a lower max drawdown than the old boring Core Four. Obviously hindsight is 20/20 but these results are just incredible.

The Core Coin strategy generation 15% alpha above the S&P500 benchmark. The Sharpe ratio is off the charts, as it would be given that we got such a good return given the risk we took.

The value I really want to key in on is the Value at Risk (VaR)

These are monthly probability projections that calculate the amount of money you have at risk while invested in any given month. The 5% historical value at risk is just 5.6% which means, assuming the market is functioning under normal circumstances, that if we were required to hedge our risk we would only need to insure 5.6% of our portfolio from potential losses. That’s really good.

Strategy Recap

Alright so the backtest looks phenominal so lets quickly recap the strategy.

We are gonna call this portfolio, the Boglehead Core-Coin Strategy. The reason we are calling by this name is because Boglehead investors appreciate rules based investing that limits fees, risks, and human emotions. This new strategy is going to made up of

• 48% US Stocks Index
• 24% International Stock Index
• 20% Long Term US Treasuries
• 8% Bitcoin

I’m gonna use M1 finance for the the stocks and bonds and BlockFI for the bitcoin. BlockFI is currently paying 6.0% annual interest to hold your bitcoin so why not take that free 6% return? If you are interested in this please consider using my affiliate link in this videos description.

M1 Finance App Organize Stocks into Pies!

FINAL THOUGHTS

Okay so what’s my assessment of the Core Coin portfolio backtest? Well, frankly I’m speechless. Its amazing. In fairness, Bitcoin could have gone to 0 or lost a ton of money which would have led to a different outcome entirely but given that we have included Bitcoin in a small percentage and we are monitoring the risk loss probabilities each month I’d have absolutely no problem recommending this portfolio to anyone in the aggressive accumulation phase of their savings journey.

Now if you excuse me, I have some bitcoin to buy.

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