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Importance of diversification across asset classes

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BITSTAMP:ETHUSD   Ethereum / U.S. Dollar
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In this post, we have attempted to cover the importance of portfolio diversification. To drive our point home, we have taken a 2-year reference and divided it into 3 parts:
  • Pre-pandemic : January 2019 to 10th Feb 2020
  • Height of the pandemic : Feb 2020 to 23rd March 2020
  • Post pandemic : 30th March 2020 till present

The 3 classes of asset that we included in this analysis are:
  • Cryptocurrency- ETH
  • Stocks- S&P 500
  • Commodity- Gold

Pre-pandemic period: ETH was on a bull run as were other major crypto currencies. It shot up more than 125% during that period. The S&P 500 index was up by 38.5% during the same period, while the precious commodity, Gold , rose by 24.15%.

At the height of the pandemic: It was a testing time for the diversification of portfolio. Holding any particular asset class and not diversifying at all, proved to be a disaster for many naive investors. ETH dropped by approximately 65%. The S&P 500 index tanked almost 33%, while Gold , considered to be the safest asset, lost 12%.

Post-pandemic period: It was one of the massive bull-runs in the history of bull runs. Patient investors who entered into the markets at the height of the pandemic saw their wealth growing multiple times. Moreover, with the Central banks around the world printing currencies at a furious pace, the only way to beat inflation was to invest in high alpha generating assets.

ETH shot up almost 1800% during this period, which is a 18x return. The S&P 500 shot up over 94%, while Gold went up by a meagre 21%.

Considering the returns and the risk over these 3 periods, it can be stated with absolute conviction that the need for diversification is supreme.

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