Why Traditional Investment Portfolios Have Failed?

The only two types of assets that can consistently break through the 11% return benchmark are technology assets and cryptocurrency.

Written by: Raoul Pal

Compiled by: Chopper, Foresight News

You have been managing your assets according to the financial advice given by others, yet the results have not been satisfactory.

You save a sum of money, allocate a pension, invest in index-tracking funds, and if the timing is right, purchase a property... Every year, you receive an asset statement showing an increase compared to last year. You keep the documents, feeling a slight comfort. Twenty years pass quickly, and while your account balance rises, your real life has not fundamentally changed. You still cannot afford a whole year off, and you still cannot refuse a job you dislike. Logically, by now you should have greater financial freedom, but reality tells a different story. Perhaps at some moment, you blame it all on yourself.

But the problem does not lie with you. In the past, people advised you to build a traditional asset portfolio: allocate bonds for risk aversion, buy a small amount of gold, purchase property if possible, and invest in index funds for appreciation, diversifying assets to avoid heavy losses from a single asset's crash. This advice was effective in the past, but it was suited for a different era, one that no longer exists.

I have experienced this firsthand; building such investment portfolios was once my job.

I was a hedge fund manager, and this asset allocation logic was not my personal preference but rather a survival rule in my industry. People constructed asset packages capable of withstanding various market shocks, hedging one type of risk against another, holding them with peace of mind because a single asset's crash would not deliver a fatal blow to overall wealth. I practiced this trading paradigm for many years. For the past twenty-one years, I have continued to write research communications for hedge funds and family offices, and the macro environment that sustains this system is undergoing dramatic changes.

Next, I will explain a new asset allocation approach, clarifying that this plan is not as radical or speculative as the public stereotype suggests.

The Source of Economic Growth

Let’s start with the underlying logic of economic growth, from which all wealth rules derive. A country can achieve wealth growth through three paths: increasing labor supply, enhancing output per labor unit, or expanding through debt. This is the entire formula for economic growth.

For most of the last century, the first two engines drove economic growth. Population growth and continuous technological innovation improved labor productivity, while debt played only a supporting role. Now, both growth engines have stalled: birth rates began declining decades ago, and labor productivity growth has been decreasing for years. Economic growth now relies almost entirely on the third path—debt—which is itself a trap. Debt requires interest payments, and the only politically feasible way to repay it is through currency issuance.

Governments are continuously borrowing, with interest compounding, while central banks inject money to absorb the debt, causing the cash you hold to depreciate every year.

Global liquidity, which is the total scale of money and credit within the entire financial system, expands at about 8% per year, which is the essence of currency depreciation. If the total amount of money in the market increases by 8% each year, the scarcity of money decreases by 8%, and ultimately its value shrinks by 8% each year. On top of this, we must add everyday inflation, which is often reported as a 2%-3% increase in prices, covering daily consumption and rent costs. Almost everyone considers outperforming this figure as a financial goal. Outperforming ordinary inflation merely means maintaining your current living expenses, not that your wealth has truly appreciated.

By adding these two figures together, we arrive at the true wealth dividing line, taking an annualized return of 11% as the benchmark.

If the annualized return on assets is above 11%, your purchasing power can increase; if it is below this line, no matter how good the numbers on the statement look, your purchasing power is eroding because the currency in which your assets are valued is continuously depreciating. You need to achieve an 11% return each year just to maintain your existing wealth level.

This definition completely rewrites the criteria for asset selection. We no longer obsess over choosing assets that appear safe and well-diversified; instead, we filter for assets that can exceed the 11% benchmark return.

Next, we will evaluate the mainstream investment categories on the market one by one.

Evaluating Mainstream Assets

Let’s start with bonds. Most people hold bonds but have never truly understood their essence.

Bonds are essentially a loan. You lend out funds, receive a fixed interest each year, and recover the principal at maturity. This is the complete yield model of bonds. The fixed interest rate set by the issuer is aligned with ordinary inflation levels and does not account for the depreciation caused by currency dilution. For example, a government bond with an annualized return of 4% promises to pay 4% interest each year, but the currency in which it is valued depreciates at a rate of 8% per year; by the time the bond matures and the principal is returned, the actual purchasing power of that money has already significantly declined. Even if you hold the bond until maturity and receive every promised return, your actual wealth still shrinks.

Real estate is the most controversial asset class and should be approached with caution.

The underlying logic of real estate hedging against depreciation still holds: borrowing at a fixed rate to purchase a physical asset valued in continuously depreciating currency. The actual burden of debt decreases year by year, and real estate prices rise with the money supply. It is undeniable that real estate is indeed a good tool for hedging against depreciation; I personally also hold real estate.

However, a generation has relied on real estate to achieve wealth leaps, and the core dividend is not the real estate itself but the time window of mortgage loans. If you leverage to buy real estate at the beginning of a long-term declining interest rate cycle, the asset's valuation will rise year after year during the holding period. This dividend trade can no longer be replicated; interest rates first fell to zero and then rebounded.

Today, most people find it difficult to secure quality mortgages: the price-to-income ratio remains high, and mortgage rates are also elevated.

Even if you successfully obtain a mortgage, the ability of real estate to hedge against currency depreciation is far from what it used to be. Since 2007, the speed of global liquidity expansion has far outpaced real estate prices, and the ratio between the two has been declining. The nominal dollar price of your real estate may be rising, but the actual purchasing power has long since diminished.

Now let’s talk about gold. We need to view the value of gold objectively and avoid drawing incorrect conclusions based on one-sided judgments from the past year's market.

Gold has experienced an epic rise. In January of this year, gold prices broke through $5,500 per ounce, reaching a historic high; this article is written at the end of August, with gold prices falling back to around $4,600, marking an increase of about one-third for the year. Financial media has even given this wave of market activity a special name: the depreciation trading market. On the surface, gold's returns significantly exceed the 11% benchmark, while I previously did not hold a favorable view on gold's appreciation potential.

The core difference between the two lies in the fact that comparing gold prices with the scale of central bank balance sheets over the past fifteen years shows that gold's value has generally kept pace with the expansion of central bank balance sheets, which is precisely gold's positioning. Gold can maintain purchasing power and hedge against the depreciation risks brought by excessive currency issuance; this value cannot be denied, and I do not intend to belittle gold's role.

Maintaining purchasing power and achieving wealth appreciation are two completely different things. Gold does not have a user penetration growth curve and lacks any commercial ecosystem built around it. Gold price fluctuations are entirely dependent on market panic regarding the currency system; with current market anxiety running high, gold prices are naturally elevated. Over the long term, gold will not achieve compound appreciation simply because the number of global users increases. Gold is responsible for preserving value, not for creating new wealth.

Finally, we have stock assets, with the indices that the public generally holds performing better than the previous asset classes. Over the past decade, the S&P 500 index has had an annualized compound return of about 13%, barely crossing the 11% threshold; this performance is based on the strongest super bull market in financial history lasting a decade.

The only two types of assets that can consistently break through this return line are technology assets and cryptocurrency.

Why Technology and Cryptocurrency Assets?

We compare the ten-year annualized returns horizontally; a ten-year cycle is sufficient to cover a round of market crashes while being fully within the macro cycle of currency depreciation.

Gold has an annualized return of about 12%, the S&P 500 about 13%, the Nasdaq 100 about 20%; Bitcoin, depending on statistical criteria and starting time, has an annualized return range of 58%-70%.

In contrast to the 11% return benchmark, the differences are clear.

The logic behind this result is far more critical than the return rate itself. If the returns are merely a matter of luck, this conclusion has no practical value.

The reason these two types of assets can achieve high compound returns lies in the fact that both follow the growth pattern of user penetration S-curve, rather than traditional value assets. Metcalfe's Law states that the larger the network scale, the higher the value obtained by existing users. User penetration does not increase linearly but follows a classic S-curve: slow growth in the early stages, explosive expansion in the middle, and market saturation in the later stages. As long as the asset is in the steeply rising growth phase of the curve, the returns can logically outpace the speed of currency issuance, rather than relying solely on market sentiment speculation.

Therefore, our focus is no longer on whether technology and cryptocurrency assets outperform traditional categories, but whether their user penetration curves have reached their endpoints. The answer is no; the next batch of participants entering the ecosystem will not be human users. I will elaborate on this later, as it is a long-term variable that the current market severely underestimates.

Why Traditional Diversified Allocation Has Lost Its Protective Effect

Traditional investment portfolios are built on a core assumption: bonds, gold, real estate, and stocks belong to four completely independent risk types. By holding these four types of assets, a single black swan event will not breach the overall asset package. This logic has held true for a long time, but after 2008, the landscape changed completely. Liquidity has become the core force determining the pricing of all assets; the four types of assets no longer correspond to four independent risks but are essentially different pricing products under the same macro variable.

Your bond trading essentially bets on changes in liquidity. Gold is a liquidity trading target, and real estate also fluctuates with liquidity cycles. Index funds are merely better-packaged liquidity assets.

I do not deny the significance of diversified allocation; a diversified layout is a reasonable financial strategy, and I also diversify my holdings. The problem lies in the underlying assets of traditional asset packages: among the four types of assets, three cannot exceed an 11% return benchmark, and the fourth can only barely meet the standard during the strongest bull markets in history. You painstakingly mix four types of assets, essentially betting on the same macro logic, while the returns of the vast majority of assets cannot outpace the expansion rate of the money supply.

The real question worth pondering is not how many holdings you have, but whether the funds you use to seek appreciation are allocated to assets with long-term compounding potential. Strive to position yourself in genuine long-term growth tracks; if all the assets you diversify into underperform the benchmark, the so-called stable diversification merely provides psychological comfort and does not enhance actual returns.

Where Value Truly Resides

In the crypto industry, we need to decide which tier of assets to allocate, objectively weighing trade-offs and rejecting absolute conclusions.

Application layer protocols can indeed generate high returns if you select quality projects that meet real commercial demands, with returns potentially exceeding those of underlying public chains.

The challenge lies in accurately filtering out winning applications. The underlying public chain carries the settlement activities of the entire ecosystem; regardless of which application ultimately prevails, value will settle in the underlying infrastructure. You do not need to precisely predict which application will win; you only need to be confident that future economic activities will gradually migrate on-chain. Betting on the underlying public chain may yield lower returns than betting on blockbuster applications, but the difficulty of judgment is lower, and the ecosystem still has enormous growth potential.

This is also why traditional valuation models do not apply to crypto assets. The industry directly copies stock valuation systems without ever verifying whether these metrics are suitable for the blockchain ecosystem: transaction fee multiples, revenue growth rates, and locked value ratios. At GMI, we backtested all valuation metrics for 12 mainstream public chains, and none could effectively predict future returns. The only metric with predictive power is whether capital inflows remain in the ecosystem long-term.

Once you understand the essence of blockchain, this logic becomes easy to grasp. Public chains are not companies that sell products for profit; the network's value comes from all the ecosystem applications built on it, not from earning fees. Valuing Ethereum solely based on transaction fees is akin to estimating the entire internet's value in 1998 based on email service fees.

This is also why I choose to write this article now rather than waiting two years.

All industry scale forecast reports on the market hide the same underlying assumption: ecosystem users are human, participating in economic activities at the human pace, with a few transactions per day, minimal payments per month, and occasional query requests.

This assumption will soon become invalid. AI entities, which require no human instructions and can autonomously perceive, decide, and execute operations, are about to enter as independent economic participants, no longer merely serving as tools. According to industry forecasts I have seen, the ratio of non-human intelligent identities to human employees within companies may reach 80:1 in the future.

AI entities cannot open bank accounts; they lack legal identity, cannot visit offline locations for transactions, and cannot tolerate traditional settlement systems that close at 5 PM or take three days for transfers. Intelligent entities need a programmable currency, relying on an ever-operating payment infrastructure, which is precisely the capability inherent in public chains that traditional financial systems cannot achieve.

The entire infrastructure is being publicly implemented: Anthropic has released an open-source model context protocol; Google has launched Agent2Agent, releasing a preview version of WebMCP, allowing websites to directly open functional interfaces to intelligent entities without simulating human clicks; Coinbase has restarted the x402 protocol, enabling intelligent entities to pay each other via HTTP links.

This set of products being implemented itself is a forward-looking demand for settlement capabilities. Regardless of whether speculative funds enter the market, real business needs will continue to expand.

A Risk Warning Worth Acknowledging

Betting on a single track can easily lead to survivor bias, and those who deliberately avoid this risk often have marketing motives.

You can always find stories of people going all-in on a single asset to achieve financial freedom, but you rarely see the thousands of investors who heavily invested in a single asset ultimately going bankrupt. The failures do not speak up. You might want to read anonymous trading confession posts; the real outcomes are often bleak, which is a more objective market sample than stories of sudden wealth.

Therefore, I do not recommend that you bet all your funds on a single asset; this has never been my viewpoint.

The true financial logic is: when you lock in a real long-term growth track, the number of holdings does not have a decisive impact. Ultimately, returns are determined by two core variables: the proportion of funds allocated to the growth track and the holding period of the assets.

There is also a third iron rule, a hard prohibition: do not use leverage. Do not use slight leverage, do not use so-called cautious leverage, and do not set stop-loss protections. Leverage will strip away the core confidence of this long-term strategy—during extreme market conditions where assets retract by 50%, you should not be forced to liquidate. Even if your judgment on the long-term cycle is entirely correct, you may still face liquidation during a sharp decline over two weeks; the market will not compensate for your losses simply because your long-term logic is correct.

For the vast majority of ordinary people, a reasonable asset allocation plan is a layered layout. Retain a portion of traditional asset combinations to ensure asset safety and peace of mind; allocate a significant amount of funds to long-term growth tracks, controlling the position of this high-elasticity asset, so that even if the asset halves, it will not force you to make a panic decision; the remaining energy can be invested in life.

Over the past thirteen years observing the crypto market, I have found that investors who can achieve long-term compounding are often not frequent traders. In the midst of a market crash, the drawdown is a shocking reality; when viewed over a longer time frame, it is merely a trivial fluctuation on the chart. Doing nothing is itself a trading strategy, but very few truly practice this strategy; it is far more difficult than one might imagine.

What is the Real Opportunity Cost?

If your asset's annual compounded return is below the 11% benchmark, the wealth you earn from your labor that year can afford you less freedom than the previous year.

Investors who understand this logic ultimately do not gain a large amount of paper wealth but rather the option to choose. They do not need to constantly monitor the market, have the confidence to refuse work they dislike, and can go to the places they aspire to while still young, accompanying the people they cherish.

This is the true opportunity cost behind the 11% return benchmark.

I will not directly provide you with a fixed asset allocation list. I do not understand your debt pressure, investment cycle, or risk tolerance. Anyone who directly gives a position allocation without knowing these three premises is essentially betting with your funds based on guesses.

What I can offer you is this set of screening criteria. Use the annual 11% return standard to measure all the assets you hold one by one. Regardless of how stable and comfortable your holdings feel, any asset that cannot outperform this benchmark is consuming your time and freedom.