If the last two years have taught us anything, it’s that there’ll always be volatility in the financial markets.
That’s why portfolio diversification is so important.
Today, we’ll run through the basics of what portfolio diversification means — and we’ll look at why the next asset class that anyone should invest in is likely digital assets, so if you’re sitting there wondering, ‘What should I do with my money?’
Read on for inspiration.
What is portfolio diversification?
Portfolio diversification refers to the practice of investing in multiple sectors and asset classes to minimize your risk while maximizing your returns.
In essence, a diversified portfolio doesn’t suffer from the heavy volatility that individual markets inevitably see, meaning that even if the bottom falls out of, say, the real estate sector, a diversified portfolio shouldn’t drop too much.
In contrast, a well-balanced investment portfolio should steadily increase in value, dipping slightly when the bearish sentiment hits (studies suggest diversification can reduce losses during a downturn by over 10%) yet still riding the wave of more bullish times.
But what does ‘well-balanced’ mean?
In practice, there’s no single definition. Every individual needs to find an allocation that weighs risk against reward, only holding as much of a high-risk asset class as you’re comfortable with.
So — that’s the case for portfolio diversification. Now let’s turn to what makes digital assets such an attractive opportunity.
The case for investing in digital assets
Few investors get to see the birth of an entirely new asset class.
But thanks to a mix of computer science, cryptography, economics, and network theory, that’s what we’ve experienced with digital assets.
Digital assets refer specifically to blockchain assets: the first being Bitcoin, although there are now thousands of digital assets, with many believing they will transform the global financial ecosystem.
Why is that? Well, people feel that blockchain technology can enable the first real challenge to modern economic theory. And if they’re right, this will create one of the most exciting investment opportunities of this century.
That said, most investors still shy away from digital assets, believing them to be risky, volatile, and generally insecure.
But the truth is: investors don’t need to be anxious.
If you build the right portfolio, you can enjoy the benefits of digital assets in a secure and risk-adjusted way. Which means you’ll not only unlock a unique return stream for your portfolio. You’ll benefit from a unique diversification opportunity too.
That’s because digital assets are a brand new investment that is uncorrelated with every other asset class.
If that’s not a reason to hold even a modest allocation, we don’t know what is.
How digital assets will boost your portfolio
In the last decade, Bitcoin has proven the power of decentralized systems.
The cryptocurrency fast became the poster child for digital assets. And the successful proof-of-concept allowed for other blockchain assets to flourish.
We now have protocols that work as secure stores of value, seamless mediums of exchange, and innovative decentralized finance (DeFi) setups that enable anyone to lend or borrow money with little more than an internet connection.
Thanks to the breadth of asset types — any investor can improve their return-to-risk ratio, as shown by how the performance of three basic strategies compares to a standard 60–40 global equity and bond split:
- Add 1% digital asset allocation: increases annual returns by 1.15%, reduces volatility by 0.03% and improves the return-to-risk ratio by 22%.
- Add 3% digital asset allocation: increases annual returns by 3.47%, increases volatility by 0.15% and improves the return-to-risk ratio by 62%.
- Add 5% digital asset allocation: increases annual returns by 5.82%, increases volatility by 0.60% and improves the return-to-risk ratio by 95%.
As you can see, digital assets boost the return-to-risk ratio of a standard portfolio based on historical data. Digital assets are uncorrelated with stocks and bonds, so they help investors achieve higher risk-adjusted returns.
Elitium can help you invest in digital assets
If you’re wondering which digital asset makes the best investment, decentralized finance (DeFi) could be the perfect place to start.
DeFi has moved the dial for digital assets in the last eighteen months, with the sector growing from $20bn in total locked value at the beginning of the year to nearly $100bn at the time of writing.
In no uncertain terms, DeFi is transforming finance more quickly than anything in the last century. And it’s where some of the most promising opportunities lie.
You can allocate a percentage of your portfolio to tokens associated with the US Dollar, British Pound, or the Euro and earn up to 7.5% APY — or you can invest in gold, and both benefit from capital appreciation alongside earning a return.
To learn more about investing in digital assets, schedule your free walkthrough of the Elitium platform by clicking here.