Does Bitcoin Provide Portfolio Diversification? | Why are Rising Rates Bad for Tech Stocks?
19m
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Invest Smarter
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Rising rates, in theory, are bad for tech stocks. Is that always true? I dive in with the help of a recent article from Ben Carlson. Next, I look into how adding a bit of bitcoin to your portfolio could mean you are investing like a Nobel Prize-winning economist. Finally, we answer a listener's question about retiring early before a feared financial disaster in the economy.
Outline of This Episode
[] Are rising rates bad for tech stocks?
[] Can Bitcoin help you diversify your portfolio?
[] What should Steve think about retiring early while he also fears a market crash?
Why are Rising Interest Rates Bad for Tech Stocks?
This year, there is a definite relationship between rising rates and falling stock prices. The other day, Ben Carlson put out a great piece on his blog showing the inverse relationship between yields and the QQQ, which is the 100 biggest stocks in tech-heavy NASDAQ. Sure enough, in 2021, rising rates have equaled weakness in the QQQ. Why is this happening? In theory, it's all about cash flows. Every single financial assets valuation is equal to the present value of future cash flows. To come up with a present value of future cash flows, you discount that future cash flows at prevailing interest rates (or some variation of it depending on the asset class). The higher the discount rate, the lower the present value.
Can Bitcoin help you diversify your portfolio?
What do Bitcoin and legendary economist Harry Markowitz have in common? They both advocate for modern portfolio theory. At least Bitcoin has up until now (that is subject to change without notice!). Modern Portfolio Theory says that a rational investor should choose an optimal portfolio that maximizes return but doesn't take too much risk. While Bitcoin on its own has the volatility that would make even the staunchest investor quake, when added modestly to a portfolio, it has displayed positive contributions to portfolios as a whole.
Steven has a Question
Steven asks whether he should consider delaying his early retirement because he has been reading articles and fears a financial crisis could be around the corner. Without speculating on the odds of a crisis, I attempt to help Steven think through some considerations and ultimately recommend that he may be well served to speak with a planner who can stress test his financial plan.
Articles Mentioned
- Why it is wise to add bitcoin to an investment portfolio
- Are Rising Interest Rates Bad For Tech Stocks?
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