Preamble
While it is difficult to provide a definitive answer without knowing the exact details of investments made in each portfolio, in general, stocks tend to have higher long-term returns but with higher volatility, while bonds tend to have lower returns but with lower volatility. Bitcoin is a relatively new and volatile asset class, experiencing significant price increases as well as dramatic declines. This means that adding bitcoin to a balanced stocks-bonds portfolio can increase potential gains but can also increase the risk of losses.
In terms of returns, looking at the period from 2013 to 2023, bitcoin has experienced periods of significant growth as well as sharp declines. Assuming that the balanced stocks-bonds portfolio generated an average annual return of 6% over the period, adding 5% of bitcoin would likely have increased the total portfolio return but would also have increased the overall portfolio volatility.
Period from 2013 to 2023 (10 years)
Between 2013 and 2023, the S&P 500 had an average annual return of approximately 13.6%, while the universal bond index had an average annual return of around 2.7%.
Assuming that the balanced stocks-bonds portfolio followed these same indices with a weighting of 60% for the S&P 500 and 40% for the universal bond index, the average annual return of this portfolio would have been approximately 9.3% ((0.6 x 13.6%) + (0.4 x 2.7%)).
Adding 5% of bitcoin to this portfolio would increase the weighting of stocks in the portfolio to around 63%, the weighting of bonds to around 37%, and the weighting of bitcoin to 5%.
Assuming that bitcoin had an average annual return of 87.7% between 2013 and 2023 (corresponding to the growth in bitcoin price over this period), the average annual return of the balanced stocks-bonds-bitcoin portfolio would be around 11.7% ((0.63 x 13.6%) + (0.37 x 2.7%) + (0.05 x 87.7%)).
It is important to note that these calculations do not account for costs associated with investing in these different assets or for price fluctuations and volatility.
Comparison Table
Assuming a $100 million portfolio with a balanced 60% stocks-40% bonds allocation versus the performance of the same portfolio with an additional 5% allocation to bitcoin from 2013 to 2023, using the S&P 500 for stocks and the universal bond index for bonds.
Summary table of assumptions and results for the two portfolios:
| Portfolio | Average annual return |
Portfolio value after 10 years |
| Stocks (S&P 500): 60% Bonds (Universal Bond Index): 40% |
9,3% | 259 300 000 $ |
| Stocks (S&P 500): 63% Bonds (Universal Bond Index): 37% Bitcoin: 5% |
11,7% | 422 500 000 $ |
Remarques :
- The assumptions of an average annual return of 13.6% for the S&P 500, 2.7% for the Universal Bond Index, and 87.7% for bitcoin were used.
- The portfolio values after 10 years were calculated using the future value formula: Final value = Initial value x (1 + average annual return rate)^number of years.
- The balanced stocks-bonds portfolio would have a final value of approximately $259.3 million after 10 years.
- By adding 5% of bitcoin to this portfolio, the final value would be approximately $422.5 million after 10 years.
- It is important to note that these results do not take into account investment costs, asset price fluctuations and volatility, as well as other important factors related to investing.
Taking into account management fees and performance bonuses
| Portfolio | Initial investment |
Average annual return
|
Cumulative management fees |
Performance bonuses |
Portfolio value after 10 years |
| Stocks (S&P 500): 60% Bonds (Universal Bond Index): 40% |
100 000 000 $ | 9,3% | 26 840 000 $ | 0 $ | 232 640 000 $ |
| Stocks (S&P 500): 63% Bonds (Universal Bond Index): 37% Bitcoin: 5% |
100 000 000 $ | 11,7% | 35 204 644 $ | 41 466 678 $ | 306 828 187 $ |
Remarks:
- An annual management fee of 2.5% has been applied to both portfolios, cumulatively over 10 years, resulting in $26.84 million for the balanced stocks-bonds portfolio and $35.20 million for the portfolio with the addition of bitcoin.
- For the portfolio with bitcoin, and following industry standards, a performance bonus of 20% per year has been added for returns exceeding a risk-free rate of return of 6%. Based on the assumption of a 2.7% return for the universal bond index, the risk-free rate would be approximately 3%. This means that any return above 6% would be subject to a 20% performance bonus. Cumulatively over 10 years, this amounts to $41.47 million for the portfolio with bitcoin.
- The portfolio values after 10 years have been calculated by subtracting the management fees and performance bonus from the initial investment and using the future value formula: Final value = Initial value x (1 + average annual return rate – annual management fees – annual performance bonus)^number of years.