Diversification of one’s retirement portfolio can be a key to long-term financial success and building your nest egg. By mixing up what assets you own, no single asset crash can take down your whole savings.
And while we do not give investing advice, we are interested in comparing different asset classes for purely educational purposes.
In a study by Strategic Advisors on the last major domestic economic crisis—which emerged during the financial collapse in 2008-2009—researchers found that diversified portfolios were able to cut out major losses without missing much when the recovery came:
As you can see from the limited range of volatility in diversified portfolios, these portfolios’ losses were capped much earlier. On one hand, the full range of the amazing long-term boom in the stock market—spanning from the bottom in March 2009 to the top in 2014—wasn’t captured completely in a diversified portfolio. However, the diversified portfolios did enjoy a smoother boom and bust cycle with less overall risk.
Many investors find this balance of gains and stability attractive when considering their retirement portfolios. After all, no one wants to risk the finances they’ve set aside for their old age.
These days, people have more options to choose from than ever before when it comes to diversifying their retirements savings. This can make it challenging for anyone to figure out which investments they should choose.
So, we’re going to look at two industries and asset groups. One is hundreds of years old and often seen as the best way to pair losses when other investments are crashing. The other is just over a decade old, but comes with a whole new approach to both protect from losses and take advantage of recoveries.
Bitcoin and Cryptocurrencies
From the early days of Bitcoin, its biggest draw was its decentralized platform. By operating on a blockchain, without a specific country or government able to completely regulate it, Bitcoin was seen as an “anti-dollar.”
Its mysterious founder Satoshi Nakamoto noted in 2009, shortly after Bitcoin launched:
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.”
The U.S. dollar and other fiat currencies are always in jeopardy of central bank errors, inflation, and breaches of privacy.
And these days, first in 2008-2009 and then in early 2020, we’ve seen just how far central banks will go to shore up the economy. Massive balance sheet inflation combined with stimulus spending from governments themselves come with risks.
Creating a massive inflow of new money is always a risk. But with Bitcoin and similar mined cryptocurrencies, protocols are in place to limit the amount of new coins or tokens in circulation by setting fixed rules into place.
So, right off the bat, you can see how this asset class would be a valuable hedge against any dollar-denominated asset, be it stocks or bonds.
Unlike their early days, it’s easier than ever to integrate cryptocurrencies into retirement accounts. Through self-directed IRAs (SDIRAs), buying and trading digital currencies in tax-sheltered accounts is as easy as buying stocks or mutual funds.
Oil and Retirement
One of the oldest industries in America, and much of the world for that matter, is oil. One of the earliest and most well-known monopolies during the Industrial Revolution was Standard Oil.
As recently as 20 years ago, oil stocks were still among the largest publicly-traded companies in the world.
Oil has also grown some countries’ economies from dirt poor into global powerhouses.
In other words, oil is an asset class of its own. And it has always been surrounded by huge money and large profits. So, for savers, it can be quite a compelling place to park their money.
It is also practically the antithesis of crypto. While digital currencies operate completely separate from central banks and fiat currencies, oil is still today traded in US dollars around the world.
The arrangement establishing that oil is traded in US dollars internationally was born out of the 1944 Bretton Woods Agreement. Even after gold became untangled with the dollar once President Nixon ended the gold standard, oil remains linked.
This has essentially linked the strength of the dollar to the long-term outlook for oil, so that they have gone hand-in-hand.
In conventional IRAs and 401(k)s, preselected funds are full of energy stocks and bonds. Self-directed accounts allow direct investment in oil equities, bonds, funds, and even futures.
So, let’s look at how these two night-and-day asset classes actually compare, head-to-head.
Comparing Cryptocurrencies to Oil
From an apples-to-apples standpoint, it can be a little difficult to compare these two unique assets. Bitcoin, for instance, has barely a decade of trading under its belt. In fact, 2020 is the first full-blown recession it has ever weathered. Oil, on the other hand, has seen everything from the Civil War through the Great Depression and the death of the gold standard.
But that doesn’t mean we can’t compare the performance of each asset.
Since 2020 is the only recession the two share, let’s start there. In just the first five months of 2020, as lockdowns went into effect and unemployment reached 80-year highs, Bitcoin grew in value from around $7,000 to nearly $9,500 or about 36%:
However, as you can see, before making this high jump, it first took a nosedive as investors and traders scratched their heads over how cryptocurrencies were to fit into a recession economy.
Oil’s first half of 2020 was much harsher:
What this chart doesn’t show is that at one point, the price of oil actually dipped below zero for the first time in history. Meaning, producers were willing to actually pay people to take it off their hands.
So, going back to the important point about diversification, oil only exacerbated losses savers were taking. Bitcoin turned initial uncertainty into steady traction for savers.
The full picture of 2020 might not be completely realized for years, just like the financial collapse of 2008 and 2009 is only now being fully comprehended. But that’s not to say we don’t already see a clear advantage in one asset over the other.
Cryptocurrencies’ greatest advantage is that they remain untethered from fiat currencies and central banks. The exact opposite is true of oil, which by a 76-year-old agreement directly links the US dollar to oil prices.
Diversification is an essential tool and strategy savers can use to both safeguard their portfolios, while not missing out on gains.
Commodities such as oil have, at times, been seen as a great hedge against sudden economic drops and uncertainty. But it is also very closely linked to the US dollar. By its very nature as a source of energy, with global industries slow, demand for oil can absolutely collapse.
Cryptocurrencies, on the other hand, are designed specifically to do the opposite: carry no link between it and fiat currencies like the dollar. It can offer a direct hedge against central bank risk.
And while oil has been easy to own in retirement accounts for decades, cryptocurrencies are just as simple to diversify into these days. Any true hedging and diversification strategy might want to consider all of this very carefully.