Could Ray Dalio's portfolio do even better by investing in cryptocurrencies?

Billionaire fund manager Ray Dalio has long been a skeptic of cryptocurrency investing, but he wrote in a LinkedIn post last year that cryptocurrency investing had gone from a "highly speculative idea" to an asset class. which would probably have "some value in the future." So at a time when his defensive approach is more popular than ever, we thought we'd try an experiment. Seeing how his famous multipurpose portfolio would perform with a cryptocurrency investment in the mix.

What's in Dalio's wallet?​

Most classic portfolios have a larger investment allocation to stocks and less to other asset classes with the logic that stocks grow more over time than the rest. But the multipurpose portfolio is different: it has more exposure to bonos than to stocks, and the rest in physical and other raw materials. This is a lower risk portfolio, built to protect long-term wealth in any economic environment.

Asset class	Most suitable economic environment	Suitable ETF	Invested percentage
Global actions	Strong economic growth and low or stable inflation.	Vanguard Total World Stock (VT).	30%
Diversified raw materials	High inflation and slow economic growth.	Invesco DB Commodity Index Tracking Fund (DBC).	7.5%
Gold	High inflation and strong economic growth (stagflation).	SPDR Gold Shares (GLD).	7.5%
Long-term bonds	Low inflation and slow growth. They grow more than medium-term bonds when interest rates fall.	Vanguard Long-Term Treasury Index Fund (VGLT).	40%
Medium-term bonds	Low inflation and slow growth. They grow less than long-term bonds when interest rates fall.	Vanguard Intermediate-Term Treasury Fund Index (VGIT).	15%

The multipurpose portfolio is designed to protect us from large market declines and "black swans." But their returns generally aren't going to skyrocket in the long term. It is stable and consistent, but perhaps too defensive for those looking to grow their capital over the next 10, 20 or 30 years. This is where investing in cryptocurrencies, such as Bitcoin, appears on the scene, which seems to do well as a hedge against monetary debasement. After all, their currency supply is finite and tends to rise further when central banks expand the money supply by purchasing government bonds. That is not what is happening now in the United States, the United Kingdom and Europe, where central banks have tightened monetary policy, raising interest rates in an effort to curb inflation. But that doesn't mean it won't happen again: If the economy sinks more than expected and drags inflation down with it, those central banks could be forced to shift gears again. And investing in cryptocurrencies like Bitcoin would be a valuable asset to own in that scenario.

What impact would a cryptocurrency investment have had on the multipurpose portfolio?​

Given the short life of Bitcoin, there is not much history to rely on to adequately verify the results. But to be as fair as possible, let's make some assumptions.

1. We choose two time periods, each starting near the bottom of a bear market. We also choose a long-term time frame and a shorter, more recent time frame to get a better overall measure of how the portfolios would have performed over time. We will choose from January 1, 2014 to June 30, 2022 and from January 1, 2018 to June 30, 2022
2. We tested the two multipurpose portfolios with an investment in cryptocurrencies. We are going to choose Bitcoin, including it in different proportions each time. In both cases, we substitute a bit of our stock investment for a cryptocurrency investment, leaving everything else the same. After all, cryptocurrency investing primarily belongs to the high-growth category. We are going to put 2% in bitcoin (28% in global stocks) in one portfolio and 5% in bitcoin (25% in global stocks) in another portfolio.
3. We assume that the portfolios were rebalanced each quarter back to their original percentage splits, selling some of the best-performing investments and using those proceeds to top up the investments that were lagging behind. With the volatility of our cryptocurrency investment, this helps us reduce risk.

So that you can check it, this would be the profitability of an investment of $10.000 in each portfolio during the period 2014-22.

Unsurprisingly, adding an investment in cryptocurrencies like bitcoin to the mix would have boosted our portfolios. But this is the most interesting thing: since we would have been balancing each quarter, the risk of our portfolio would not have risen as much. Even with a 5% investment in cryptocurrency, the maximum drawdown (the largest drop from peak to trough during the period) would have been only 2,8 percentage points greater than if we had not had Bitcoin. In other words, it is still a defensive portfolio. This might come as a surprise, considering that bitcoin has had three drops of more than 70% in that time period. And here's the best part: the risk-adjusted growth would have been higher with a larger portion of the portfolio in bitcoin. We see similar results between January 2018 and June 2022:

The numbers speak for themselves. Adding a small investment in cryptocurrencies like bitcoin to Dalio's portfolio would have improved his risk-adjusted returns. Does that mean the same will happen in the future? Only time will tell…