- Listen, I'm a simple guy.
All I want is to find the world's greatest portfolio.
One that balances risk and return
in multiple asset classes.
One that will perform even in a bad market.
One that women want and men admire.
So I build a financial model that tests a
set of 50 possible allocations of crypto, bonds and
stocks to find the very best.
And I did it.
I found the very best performer.
And the reason this is important is because
portfolios are like toilet paper and pickles.
They're not all created equal.
Some are just flat out better.
Put it this way, we have portfolio A and B.
Tell me what you'd rather choose.
They both have an expected return of 9%,
but portfolio A carries double the risk.
Which would you rather invest in?
Unless you like rolling the dice on life,
you'd probably choose option B.
But believe it or not, this actually happens in real life,
your own portfolio could very well be
far riskier than it needs to be.
And this is called the Sharpe ratio.
It's perfect for comparing portfolio types.
And if you're kind of a nerd like me,
here's what the actual formula looks like.
You take each asset's average expected return and
weight within a portfolio, subtract the risk-free rate,
which is the return that you can get
investing in essentially risk-free assets like treasury bills.
Then you divide that by the
expected risk of the portfolio.
This is how much the price
can sway, how volatile it is.
The more diversified, the less the risk.
If you feel lost, don't worry, this will
all clear up in the next few minutes.
And by the way, this entire research report,
in far greater detail was available to members of Finova
way before this video was posted.
So if you'd like access to that, plus
live coaching calls every single day - it's insane,
trade signals every single day and much, much more,
just go ahead and join the best damn finance
group on the planet, linked in the description below.
Also, we're currently running a seven-day free trial, so try
it out for yourself and just see how you like it.
Now, back to the big idea.
Some portfolios are flat out better than others.
On this graph, we can see a bunch of dots.
Each one represents a different portfolio with
different allocations of the same assets.
For example, you could have a portfolio
that's 50/50 stocks and crypto.
Or you go with 75/25 stocks and crypto.
They have the same assets.
But the expected returns and
risks are vastly different.
The further right a dot sits, the riskier it is.
The higher the dot sits,
the larger its potential return.
So all the way to the right and all the way to
the top would be the highest risk and highest potential return.
Bottom left would be the lowest
risk and lowest potential return.
And you've probably also noticed on this graph
we have kind of a boob-shaped line.
If a portfolio dot falls on this line
and has a blue color, it's considered efficient.
It maximizes relative return as well
as risks for those particular assets.
Dots not on the boob line are always inefficient.
You can do better if you get back on the boob.
Check out P1 and P2.
They have the exact same risk as
measured by standard deviation on the bottom,
basically how much prices can change.
However, P2 has a much higher expected return.
So of course, any rational investor would rather P2.
This is why it's insanely important to understand this.
Then we can take this one step further.
For any combination of assets, there is exactly ONE,
ONE combination, one point on the boob line, that
will have the best possible risk reward ratio.
This point is considered Sharpe ratio maximized.
Here we can see on the updated chart
that that point is now colored green.
And now that we discovered the best portfolio
possible, we can mess with it a bit.
We can fiddle with the risk and potential return here.
So let's say you wanted to
lower risk in your ideal portfolio.
You could do this by making
an additional investment in treasury bills.
These risk free assets currently
have a return of 3.25%.
So on an extreme, if we were to invest
100% in Treasury bills, we'd see that 3.25% return.
This is marked in purple on the graph.
But even more importantly, it creates
what's called a capital market line.
Put simply, that just means
aka volatility.
It's the best of the best
for that particular level of risk.
So if you want less risk, you
simply purchase more of those risk-free assets.
If you want more risk and more potential return,
you would take out a margin loan to buy
as much as possible of the optimal portfolio.
Okay, I know that can be a lot to take in
at first, so feel free to watch the last few minutes
twice or even three times until it all sticks.
Or maybe you just want to take
another look at the boob line. I don't judge.
For whatever reason, you need to rewind,
this all took me a while to understand as well.
But what's most important to understand is that
in those particular investments.
Now we can take our new-found knowledge of the optimal
portfolio and place it into a real life use case.
This will help us determine what data
says is the actual ideal portfolio.
I wanted to figure out the perfect
allocation into crypto, stocks and bonds.
In order to do this,
I first need to do some simplifying.
I don't have some kind of supercomputer that
can calculate every single crypto portfolio possible.
So I'm using Bitcoin as a proxy for all cryptos.
The reason I felt comfortable with this is
most all cryptos are highly correlated with Bitcoin.
Bitcoin has this kind of gravitational pull.
If it goes up or down,
so does basically every other coin.
Here we can see not only are many cryptos correlated
to Bitcoin, but also correlated to one another, where the
correlation to stocks and gold are much lower.
Beyond this, I'm using indexes as proxies
for stocks and bonds as well.
OK, we made it.
Now we can look at the 50 different stock, crypto and
bond portfolios and compare them to find the very best.
I even included some portfolios that are short
Bitcoin to try and just include everything possible.
So these portfolios range from 65% to 40% stocks,
45% to 20% bonds, and -10% to 39% crypto.
And the first thing I noticed when running these
calculations, and maybe you would have guessed this, but
This is thanks in part to the wild
price swings Bitcoin and other cryptos can have.
Here we can see an increase from a 1%
allocation into Bitcoin to 25% actually increases relative portfolio
risk by double, but at the same time it
increases the mean return by 3X.
You basically you got to risk it for the Biscuit.
First, we have the minimum variance portfolio.
This is the one that
maximizes performance while minimizing risk.
The allocation here is 1% crypto,
39.5% bonds and 59.5% stocks.
This has an expected return of 7.65% percent annually
with a standard deviation of ±10%.
Now, I thought that this was interesting because it's right
in line with what many financial advisors tend to
recommend people who are interested in crypto,
just 1% of your portfolio into crypto, if you're interested.
Now for a more aggressive approach,
we have the optimal portfolio.
This is the one that maximizes the
balance of both risk and reward.
The allocation here is 25% crypto,
27.5% bonds and 47.5% stocks.
This has an expected return of 24% with a
standard deviation of ±23%. Data says that
this is the most optimal portfolio possible.
However, it's important to note that while the MVP
is great for reducing risk and the optimal is
the best possible balance, there are several other options
that are very close to optimal.
We found that a 25% crypto allocation is optimal,
but in reality, anything from around 16%
to mid 30% yields very similar results.
You can see these highlighted in the blue oval.
So if your allocation is just a little bit off,
it isn't the end of the world.
We also need to mention that this
only shows three major asset classes.
This gets far more complicated if you add it in
like real estate to the mix or individual stocks.
So this should be looked at as a
kind of starting point for your portfolio.
And of course, there are risks here.
None of this is financial advice, first off,
so they cannot be perfect.
Unfortunately, it's impossible to tell the future, and
these models just can't take into account macroeconomic
factors like War or Elon Tweets.
It assumes rational investing, which isn't
always the case, and it assumes
that returns follow a normal distribution.
So, while we can't tell the future, we still
want to use all the tools at our
disposal to make the best investment decisions possible.
Because if we do that, we can be confident that we're
making the best choice our ape brains can possibly make.