The life we are accustomed to is structured around various routines: spring cleaning, the seasonal wardrobe change in summer, holiday gifts in December, and, in January, the favorite activity of investors reviewing their investment portfolios.
As usual, January is the time to take stock of the past year and look ahead. The more proactive investors conduct backtesting and scenario analysis, while the more passive (or "lazy," as one might say in English) simply rebalance their portfolios by realigning allocations to their original weights—selling what has performed well to buy what has underperformed.
The asset management industry is accustomed to evaluating investments based on the risk/return trade-off. In other words, the expected returns vary depending on the allocation between equities and fixed income markets.
One could say, “to each their own level of risk,” but in reality, the data point represented in the chart is merely an illustration—it does not predict the actual returns the portfolio will generate in 2025 or in previous years.
Rather, it serves as a visual representation of a fundamental principle: higher risk (measured by equity allocation) corresponds to greater potential volatility.
The narrative built around these concepts is so strong that alternative approaches are often overlooked, leading to the assumption that outperforming the benchmark or the efficient frontier is not possible.
In reality, a well-constructed portfolio can include a wide range of asset classes beyond equities and bonds. Even within these traditional categories, multiple sub-asset classes exist, as shown in the table below.
In 2025, We Face a Historic Shift That Cannot Be Ignored
Financial markets are extremely stretched, reaching all-time highs not only in price but also across numerous statistical indicators, starting with the P/E ratio, one of the most well-known metrics in finance, which typically indicates whether a stock is overvalued or undervalued.
Inflation, in my humble opinion, remains the biggest concern (even though many continue to argue that it has been tamed) because we are already seeing price pressures on energy and raw materials—just as we did in late 2021 and early 2022. And if inflation were to surge again, history tells us it would be far more severe than the initial wave experienced in 2022.
How is your portfolio structured to capitalize on—or at least shield itself from—a scenario like this?
The most observant will have noticed in the table that a new emerging asset class can no longer be ignored within the Digital Assets category: Bitcoin. It is the primary reference asset, but not the only one, in a new and expanding world often referred to as the Internet of Value.
Following the approval of the Bitcoin ETF in January 2024, which drove prices to cycle highs ahead of the Halving (the reduction in Bitcoin miners' rewards), Trump’s election and his proposal to establish a U.S. government Bitcoin reserve, and Bitcoin surpassing $100,000 per unit, ignoring this asset class has become not only impractical but outright risky.
For this reason, the Diaman Partners research team has developed a range of portfolios with gradually decreasing weights in Bonds and Equities (Global Aggregate Bond and MSCI World) and has explored the impact of incorporating a progressively increasing homeopathic allocation of Bitcoin.
As can be easily observed, a simple 2% allocation of Bitcoin in the portfolio improves the risk-return profile in a more than proportional way. This is because the maximum possible loss, in the extremely unlikely event that cryptocurrencies were to disappear, is limited to 2%, while the annual excess return contribution is significantly higher—a much more probable scenario.
The phenomenon becomes even more pronounced when allocating 5% of the portfolio to Bitcoin. As you can see, a 100% equity portfolio, if reduced by 5% in equities and replaced with 5% in Bitcoin, increases its historical average annual return (past performance, of course—future results remain to be seen) from just under 8% per year to 12% per year, representing a 50% relative increase in expected returns, while volatility rises to a lesser extent (from 16% to 17.5%).
Even more interesting is the impact of a 10% Bitcoin allocation in a portfolio. A strategy composed of 90% Global Aggregate Bond and 10% Bitcoin would have outperformed a 100% MSCI World portfolio over the past five years, delivering higher returns with significantly lower volatility and a considerably lower expected drawdown.
Alternatively, if an investor had allocated 10% to Bitcoin and 90% to MSCI World, they would have achieved double the return of a 100% equity portfolio, with a less than proportional increase in volatility.
One last compelling insight: an investor aiming to maintain the same level of volatility as a 100% equity portfolio while introducing 10% Bitcoin would only need a 60% equity allocation.
In short, not understanding Bitcoin, its network, and its mechanics is no longer a valid reason to avoid allocating a homeopathic dose in a portfolio—not just for 2025, but for the next 20 years—in line with one's risk profile.
Wishing you a successful 2025 and smart investment choices—the ball is now in your court...
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