Introducing the Bitcoin-friendly retiree portfolio: the 80/20 Boomer Bitcoin Portfolio
Everyone has written at length about the death of the traditional 60/40 portfolio. At this point, I’m not sure if there’s anyone left who would seriously recommend that allocation anymore. Although the recent rise in nominal bond yield may bring some life back to that beast, I think it’s safe to say that from my perspective the 60/40 portfolio is dead.
What is a retiree to do? Until only very recently, bonds have yielded almost nothing. They still do on a real basis even if you’re using CPI as your inflation measure. If you use an alternative rate of inflation, bonds are potentially yielding negatively on a real basis. Many retirees have had to go farther out on the risk curve to generate the appropriate returns to support their drawdowns. I’ve seen recommendations that retirees be in 100% equities! Capital preservation is highly important in retirement and having to withdraw 4% of one’s portfolio per year during a multi-year downturn is a brutal destruction of capital that the vast majority of people can’t handle.
Being a filthy degenerate Bitcoin maximalist, I have certain ideas about what Bitcoin represents and where it’s headed over the next 30 years. I am also an eager student of portfolio theory and strategy as I find the art to be pretty fascinating. I recognise that in the present place we find ourselves, not many people share my ideas or conviction on Bitcoin yet. What I do have though is a decent understanding of the fiat measures of success that the industry uses to congratulate themselves on their portfolio performances. These measures actually tell an excellent story for Bitcoin. In fact, these measures of risk-adjusted returns are why some very serious capital allocators have taken notice of the orange coin over the last few years.
In portfolio theory, risk-adjusted returns are one of the measures that people use to assess their investment performance. Reason being, if you’re up 1,000,000% because you won the jackpot on a lotto ticket, that doesn’t mean your 100% scratch card portfolio is a good idea to recommend to others. Managing risk is very important and position sizes within your portfolio should be managed according to that risk. At least, that’s how the theory goes. To an extent I wholeheartedly agree in that capital preservation is important. I think I just have different views on acceptable risk when it comes to Bitcoin. Therefore, I figure I need to meet people more than halfway in terms of recommending Bitcoin adoption.
So then, let’s have a look at a particular portfolio that I’ve been fascinated by for a while. I call it the 80/20 Boomer Bitcoin Portfolio. It’s quite simple. 80% of your portfolio is invested in cash (money market funds preferably). Very stable. The other 20% is invested in Bitcoin, or Bitcoin equivalents depending on how poor your access to cold-storage Bitcoin is on a tax-advantaged basis. I don’t begrudge anyone who has retirement funds trapped in accounts without self-custody options. People in that situation might invest in spot Bitcoin ETFs (like FBTC), or MicroStrategy stock (MSTR) if they can’t buy Bitcoin itself and take custody within their tax-friendly wrapper, like an IRA or a SIPP.
So that’s it. 80% fiat cash and 20% Bitcoin. It’s basically an all cash portfolio where 80% loses real value slowly over time but 20% gains value over time to offset those losses. The results are actually quite breathtaking when compared to traditional simple retirement portfolios. Here’s the results back-tested against the S&P500 as a benchmark, the traditional 60/40 portfolio (represented by VOO and TLT — it’s not perfect but it will do), and an old favourite, 25% VGT and 75% VOO (a tech-weighted portfolio that has historically provided higher returns than just the S&P500):
All portfolios followed the 4% withdrawal rule (i.e. you withdraw 4% of your total portfolio annualised for retirement expenses). This was represented by an across the board 0.333% per month withdrawal over the timeframe. The starting balance of each portfolio was $750,000.00 USD in January 2014 and the simulation ran through February 2024. Re-balancing (buying and selling positions to bring the portfolio back to its target allocation percentages) took place annually.
Portfolio 1 is the 80/20 Boomer Bitcoin Portfolio made up of 20% spot Bitcoin (measured by the historic price performance of BTC) and 80% money market funds. Portfolio 2 is 25% VGT and 75% VOO. Portfolio 3 is the traditional 60/40 stocks/bonds portfolio, 40% in TLT and 60% in VOO. My thinking was to include a market index, a tech-weighted “aggressive” portfolio, and the traditional 60/40 compared to my new 80/20 Boomer Bitcoin Portfolio.
As you can see in the charts above, the 80/20 Boomer Bitcoin Portfolio has historically way outperformed the other portfolios. That alone is interesting as most people would describe an 80% cash allocation as an extremely conservative position to take. But it gets better. Much better.
The Sharpe and Sortino ratios are basically a measure of risk management in relation to overall return. The higher the number the better the risk-adjusted returns. Said another way, portfolios with higher Sharpe and Sortino ratios are potentially less risky than ones with lower scores. The key difference between the two is that the Sharpe ratio considers volatility in general to be bad, while Sortino only negatively weighs downside volatility. In plain English, Sharpe penalises Bitcoin for gaining 250% in a year, but Sortino doesn’t, while both would negatively rate Bitcoin sliding 70%.
The Sharpe ratio of the Boomer Bitcoin Portfolio is 0.99 which is quite good compared to the others (0.86, 0.77. 067). The traditional 60/40 portfolio actually demonstrates the worst risk-adjusted returns of all the ones listed here with 0.67, which is considered fairly risky when compared to the risk-free rate of return (what you would have made being entirely in government bonds). What’s funny to me is that a Sharpe ratio of 1 is basically the same profile as just getting the risk-free rate. Basically, the 80/20 Boomer Bitcoin Portfolio is almost identical to a pure government bond portfolio in Wall Street speak in terms of risk. Neat little bit of maths that is.
The Sortino ratio is pretty helpful here: it’s an absolute smash out of the park grand slam for the 80/20 Boomer Bitcoin Portfolio with a 3.00 (compared to 1.37, 1.20, 1.03 for the others). A 3 is basically considered to be the absolute best risk-adjusted returns possible.
But the great performance metrics of the 80/20 Boomer Bitcoin Portfolio don’t end there. Take the Compound Annual Growth Rate (CAGR) for each portfolio. CAGR is basically what you get if you annualise the performance of a portfolio instead of looking at the total returns over a longer time period. The 80/20 Boomer Bitcoin Portfolio wins again with a CAGR of 21.09%. That means that if you had adopted this portfolio in 2014, you’d have made 21.09% returns on average every year through February 2024. In reality, your annual returns would vary each year as this is an average measure of sorts, but it shows just how powerful Bitcoin is at generating returns versus traditional investment asset classes. And if you’re thinking to yourself “but Bitcoin is too risky, too volatile, it could go to zero!” while reading this — remember, the 80/20 Boomer Bitcoin Portfolio is 80% CASH. That is insanely conservative!
Speaking of downside risk and going to zero, the 80/20 Boomer Bitcoin Portfolio wins again. Max Drawdown is a measure of how bad any particular period of negative returns is before retaking previous value. Basically, how bad your portfolio does in market crashes/downturns. Hilariously, the 80/20 Boomer Bitcoin Portfolio has both the lowest overall max drawdown of all tested portfolios, but it also has the best performance between recoveries on a monthly basis. That takes into account all of the extended bear markets Bitcoin has had over the years.
It also wins on annual performance. The 80/20 Boomer Bitcoin Portfolio’s best year was an eye-watering 255% annual return. It’s worst year was only -12.83% (compared to -23.41%, -23.41%, and -18.43% for the others). You basically have very little downside performance and amazing upside performance at the same time. Let’s be honest, that is the dream for every retiree.
Lastly, we’ll talk about the Holy Grail of Wall Street Portfolio Theory, market correlation. Low market correlation for a portfolio is considered a good thing as it means you in theory don’t experience the same ups and downs that the general stock market does. If your really complicated portfolio is highly correlated to the stock market (say, the performance of the S&P500) then there’s really no point to what you’re doing unless you’re somehow generating incredible returns with the same price action as the stock market, which is unlikely.
Have you seen the pattern yet? The 80/20 Boomer Bitcoin Portfolio is the clear leader. No different for market correlation. This portfolio has a very low market correlation of 0.22. The others are 1.00 for the pure S&P500, 0.99 for the 75% VOO, 25% VGT portfolio, and 0.85 for the traditional 60/40 portfolio. What this means is that you’re going to have fantastic periods in which the broader market is down and your 80/20 portfolio is soaring. Conversely, you might have days where your portfolio is down while the market is up. However, if you look at the chart above for total returns, it doesn’t matter. You’re so far outperforming the traditional portfolios on both a risk-adjusted and a raw returns basis, you can sleep comfortably knowing your money is extremely safe and working hard for you.
If you had this portfolio starting in January 2014, with $150,000 in Bitcoin and $600,000 in money market funds and assuming you re-balance once a year, you’d have been able to withdraw 4% of your portfolio every year without depleting your nest egg. In fact, over time your 4% annual withdrawals grow from a humble $30,000 a year in retirement income in 2014 to a respectable $200,000 a year by 2024. Not too bad if you ask me.
I can foresee a pretty fair objection. “Hodl, you picked a great time to allocate 20% of your portfolio to Bitcoin, all the growth demonstrated in your charts is due to your great market timing with hindsight.” In a sense, that’s completely fair. So I re-ran the analysis will all the same parameters, but starting on 1 January 2018 near the $20,000 bull run Bitcoin price top. Here’s the results:
Not quite as good as before, but still excellent. Low market correlation, lowest “worst year” performance, best year at 61.44% nearly double the others, and the best CAGR. And of course, very low market correlation. I suspect given another future cycle, you’d see similar results to the first run. It would just take a little while to overcome the inertia of having such terrible market timing for your initial allocation. And this is with the worst possible market timing. The reality would probably have been somewhere in the middle. Same for today. We’re currently reclaiming previous cycle highs before the halving (having hit an all time high price of Bitcoin of $73,700ish USD per bitcoin as of March 2024). I suspect allocating to the 80/20 Boomer Bitcoin Portfolio right now would still yield great results over a long time period in the future, but obviously I don’t have a crystal ball.
Now, I’m not trying to be tongue in cheek or make fun of Wall Street here. I am seriously recommending people take a look at this portfolio as a potential retirement plan. It has far superior returns and (perhaps surprisingly for the risk averse types out there) much better downside performance relative to traditional strategies.
You can have a look and play around with back-testing yourself. I used the website https://www.portfoliovisualizer.com and it works pretty well for testing past performance on different ideas.
As a disclaimer, I am not earning any commissions or money from any of the sites I link in this article, nor from any other source for writing this. I am just really interested in these ideas. None of this is investment advice, you need to do your own research and reach your own conclusions. I do not personally follow this allocation strategy at all, this is just a thought experiment. I hope you found this entertaining and interesting. If you did and you read all this way down and would like to experience more of my insane thoughts, you can follow me on twitter @HODLingOnward. Feel free to DM me if you’d like to send a tip in sats or say hello.
