Traditional Investment Portfolios Are No Longer Effective Amid Changing Economic Dynamics

Article by Raoul Pal

Compiled by Chopper, Foresight News

You've been managing your assets according to financial advice others have given you, but the results haven't been satisfactory.

Deposit a savings fund, set up a pension, buy an index-tracking fund, and if the timing is right, purchase a property… Each year, you receive an asset statement showing a slight increase from the previous year; you file it away casually, finding a faint sense of comfort. Twenty years pass in the blink of an eye—the account balance continues to rise, yet your real life remains fundamentally unchanged. You still can’t take a full year of vacation, and you still can’t walk away from a job you dislike. Logically, by now you should enjoy greater financial freedom—but reality tells a different story. At some point, you might blame yourself for it all.

But the issue isn't with you. In the past, people advised you to build a traditional portfolio: allocate bonds for protection, buy a small amount of gold, purchase real estate if you could afford it, and invest in index funds for growth—diversifying your assets to avoid catastrophic losses from a single asset's collapse. This advice worked well back then, but it was designed for a different era—one that no longer exists.

I understand this well—it was once my job to build such portfolios.

I was once a hedge fund manager; this asset allocation logic was not a personal preference but a survival imperative of the industry. People constructed portfolios designed to withstand various market shocks, offsetting one type of risk with another, and held them with confidence, knowing that a sharp decline in any single asset would not devastate their overall wealth. I practiced this trading paradigm for many years. For the subsequent twenty-one years, I continued publishing research newsletters for hedge funds and family offices, as the macroeconomic environment sustaining this system underwent dramatic change.

Next, I will present a new approach to asset allocation and explain that this strategy is not, as commonly misunderstood, an aggressive speculative choice.

Let’s start with the fundamental logic of economic growth, from which all wealth principles derive. A country has only three paths to wealth creation: increasing the labor supply, improving per capita productivity, or expanding through debt. This is the complete formula for economic growth.

For most of the last century, the two primary engines drove the bulk of economic growth: a steadily growing population and technological advancements that continuously improved worker productivity, with debt playing only a supporting role. Today, both growth engines have stalled: fertility rates began declining decades ago, and labor productivity growth has been steadily falling year after year. Economic growth now relies almost entirely on the third path—borrowing—which is itself a trap. Debt requires interest payments, and the only politically viable way to service it is through monetary expansion.

The government continuously takes on more debt, with interest compounding over time, while the central bank injects money to absorb this debt, causing the cash you hold to steadily lose value each year.

Global liquidity, which represents the total scale of money and credit within the entire financial system, expands at approximately 8% per year—this is the essence of currency depreciation. If the total amount of money in the market increases by 8% annually, the scarcity of money decreases by 8%, resulting in an annual erosion of its value by 8%. On top of this, everyday inflation—often reported in the news as a 2%–3% rise in prices covering daily expenses and rent—is layered on. Almost everyone aims to outperform this rate as a financial goal. Outpacing ordinary inflation merely means maintaining your current standard of living; it does not represent genuine wealth growth.

By adding the two values together, we arrive at the true wealth threshold, using an annualized rate of 11% as the benchmark.

Your purchasing power can only increase if your asset's annualized return exceeds 11%; below this threshold, no matter how impressive the numbers on your statement appear, your purchasing power is eroding because the currency in which your assets are denominated is continuously losing value. You need to achieve at least an 11% return each year just to maintain your existing wealth level.

This definition completely redefines the criteria for asset selection. Instead of focusing on choosing assets that appear sufficiently safe and well-diversified, we now screen for assets capable of achieving an annualized return that exceeds the 11% benchmark.

Next, we will evaluate the main investment categories available on the market.

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

Bonds are essentially loans. You lend out your funds and receive a fixed interest payment each year, then get your principal back at maturity. This is the complete return structure of a bond. The fixed interest rate set by the issuer is benchmarked against general inflation but does not account for the depreciation caused by currency dilution. For example, consider a government bond with a 4% annual yield that promises to pay 4% interest each year, while the underlying currency depreciates at 8% annually. By the time the bond matures and the principal is repaid, the real purchasing power of that money has been significantly eroded. Even if you hold the bond to maturity and receive every contracted payment in full, your actual wealth will still have declined.

Real estate is the most contentious category and requires careful handling.

The underlying logic of using real estate to hedge against depreciation still holds: borrow at a fixed interest rate to purchase physical assets denominated in a currency that is continuously depreciating. The real burden of debt decreases year over year, while property prices rise in line with money supply growth. Undoubtedly, real estate remains an effective tool for hedging against depreciation—I personally hold real estate as well.

But the generation that achieved wealth growth through real estate didn't benefit primarily from the property itself—it was the time window of low-interest mortgages. If one leveraged purchases during the early phase of a forty-year interest rate decline, asset valuations rose steadily over time. That wealth-building strategy can no longer be replicated, as rates first fell to zero and then rebounded upward.

Today, it is extremely difficult for most people to qualify for a high-quality mortgage: housing price-to-income ratios remain elevated, and mortgage interest rates are also at high levels.

Even if you successfully secure a mortgage, real estate’s ability to hedge against currency depreciation has greatly diminished. Since 2007, the expansion of global liquidity has far outpaced housing prices, causing their ratio to decline steadily. While the nominal dollar price of your property has risen, its real purchasing power is no longer what it once was.

Let’s talk about gold again—we need to objectively assess gold’s value and avoid drawing incorrect conclusions based on narrow perspectives amid last year’s market conditions.

Gold has experienced an epic rally. In January this year, the price of gold broke through $5,500 per ounce, setting a new all-time high; as of late August, when this article was written, the price had retreated to around $4,600, still representing a year-to-date gain of about one-third. Financial media have even coined a specific term for this rally: the depreciation trade. On the surface, gold’s returns have significantly outpaced the 11% benchmark, though I previously did not anticipate strong appreciation potential for gold.

The key difference lies in comparing the price of gold to the size of central banks’ balance sheets over the past fifteen years: this reveals that gold’s value has largely kept pace with central bank balance sheet expansion—exactly as gold’s inherent role dictates. Gold preserves purchasing power and hedges against depreciation risks caused by monetary expansion; this value is undeniable, and I have no intention of diminishing gold’s role.

Maintaining purchasing power and achieving wealth appreciation are two entirely different things. Gold has no user adoption growth curve, nor does any commercial ecosystem rely on gold. Gold price fluctuations are entirely driven by market anxiety regarding the monetary system; with current market sentiment highly anxious, gold prices naturally remain elevated. Over multi-decade time horizons, gold does not compound in value simply because more people around the world use it. Gold preserves value—it does not generate new wealth.

Lastly, equity assets have shown superior performance compared to the previous categories, with broad market indices generally outperforming. Over the past decade, the S&P 500 delivered an annualized compound return of approximately 13%, barely crossing the 11% threshold—a result driven by the longest and strongest bull market in financial history.

Only two types of assets can consistently break through this yield line: technology assets and crypto assets.

We compare the annualized returns over a ten-year period, which is sufficient to encompass one full market crash cycle and fully align with the macroeconomic cycle of currency depreciation.

Gold offers an annualized return of approximately 12%, the S&P 500 around 13%, and the Nasdaq 100 about 20%; Bitcoin’s annualized return, depending on the measurement method and start date, ranges between 58% and 70%.

Compared to the 11% yield benchmark, the difference is immediately clear.

The logic behind this result is far more important than the return itself. If the returns stem solely from luck, this conclusion has no practical value.

Two types of assets achieve high compounding returns because they both follow the user penetration S-curve growth pattern, rather than traditional value assets. Metcalfe’s Law states that the larger the network, the greater the value accumulated by existing users. User penetration does not rise linearly but follows a classic S-curve: slow growth in the early stage, explosive expansion in the middle stage, and market saturation in the later stage. As long as an asset is in the steep upward phase of this curve, its returns fundamentally outpace monetary inflation—not merely due to market sentiment or speculation.

Therefore, the focus of our discussion is no longer whether technology and crypto assets outperform traditional categories, but whether their user adoption curves have reached their endpoint. The answer is no—the next wave of participants entering the ecosystem will not be human users. I will elaborate on this later, as it is a long-term variable significantly underestimated by the current market.

Traditional portfolio construction was based on a core assumption: bonds, gold, real estate, and stocks represent four entirely independent risk categories, and holding all four assets ensures that a single black swan event cannot wipe out the entire portfolio. This logic held for a long time, but after 2008, the landscape changed completely. Liquidity has become the central force determining the pricing of all assets; these four categories no longer correspond to four independent risks, but are instead different pricing outcomes of the same macroeconomic variable.

Your bond trading essentially bets on changes in liquidity; gold is a liquidity trading instrument, real estate also fluctuates with liquidity cycles, and index funds are merely better-packaged liquidity assets.

I’m not denying the value of diversification—allocating across multiple asset classes is a sound financial strategy, and I myself diversify my holdings. The issue lies in the underlying assets of traditional portfolios: of the four asset classes, three cannot surpass an 11% return benchmark, and the fourth only barely meets it during the strongest bull market in history. By carefully combining these four asset classes, you’re essentially betting on the same macroeconomic thesis, and most of these assets fail to outpace the rate of money supply expansion.

The real question to consider is never how many assets you hold, but whether the capital you’re risking for growth is allocated to assets with long-term compounding potential. Focus on genuine long-term growth sectors; if all your diversified holdings are assets that underperform the benchmark, what’s called “steady diversification” only offers psychological comfort and won’t improve actual returns.

In the crypto industry, we must choose which layer of assets to configure, objectively weigh the trade-offs, and avoid absolute certainties.

Application layer protocols can indeed generate substantial returns; if you select high-quality projects that truly address real-world commercial needs, the returns can even surpass those of underlying blockchains.

The challenge lies in precisely identifying the winning applications. The underlying blockchain supports all settlement activities within the ecosystem; regardless of which application ultimately prevails, value will accumulate at the foundational infrastructure level. You don’t need to accurately predict which application will win—just be confident that economic activity will gradually migrate on-chain. Betting on the underlying blockchain may yield lower returns than betting on a breakout application, but it’s easier to assess, and the ecosystem still has tremendous growth potential.

This is why traditional valuation models do not apply to crypto assets. The industry has directly adopted stock valuation metrics—such as fee multiples, revenue growth rates, and locked value ratios—without ever verifying whether these metrics are suitable for the blockchain ecosystem. At GMI Institutional, we backtested all these valuation metrics across 12 major blockchains and found that none could effectively predict future returns. The only metric with predictive power is whether funds entering the ecosystem remain locked within it over the long term.

Once you understand the essence of blockchain, this logic becomes easy to grasp. A public blockchain is not a company selling products for a profit margin; its network value comes from all the ecosystem applications built on top of it, not from transaction fees alone. Valuing Ethereum solely based on transaction fees is like estimating the entire value of the internet in 1998 based solely on email service fees.

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

All market size forecasting reports across industries implicitly share the same assumption: that ecosystem users are human, participating in economic activities at a human pace—making a few transactions per day, a small number of payments per month, and occasionally submitting query requests.

This assumption will soon become obsolete. AI agents—software programs capable of perceiving, deciding, and executing actions autonomously without human instruction—are about to enter as independent economic participants, rather than merely serving as tools. According to industry projections I’ve observed, the ratio of non-human intelligent identities to human employees within organizations could reach as high as 80:1.

AI agents cannot open bank accounts—they lack legal identity, cannot visit physical branches to conduct business, and cannot tolerate traditional settlement systems that shut down at 5 PM and take three days to process transfers. Agents require programmable money built on a payment infrastructure that never stops, a capability inherently possessed by public blockchains but unattainable by traditional financial systems.

The full infrastructure is being publicly deployed: Anthropic has open-sourced the Model Context Protocol; Google has launched Agent2Agent and released a preview of WebMCP, enabling websites to expose functional interfaces directly to agents without requiring simulated human clicks; Coinbase has restarted the x402 protocol, enabling agents to make payments to each other over HTTP connections.

The launch of this product suite itself anticipates the demand for settlement capabilities; regardless of whether speculative capital enters, real business demand will continue to grow.

Betting on a single赛道 easily leads to survivorship bias; those who deliberately avoid this risk often have marketing intentions.

You always see success stories of people going all-in on a single asset to achieve financial freedom, but you never see the thousands of investors who heavily weighted a single asset and ultimately went bankrupt with zero returns—those who fail don’t speak out publicly. Take some time to read anonymous trading confession posts; the real outcomes are often bleak, and these provide a more objective market sample than stories of sudden wealth.

Therefore, I do not recommend putting all your funds into a single asset—that has never been my position.

The true logic of wealth management is this: when you commit to a genuine long-term growth sector, the number of assets you hold is not decisive. Your final returns are determined by two key factors: the proportion of capital allocated to the growth sector and the duration of your investment.

There is a third golden rule, a hard prohibition: do not use leverage. Do not use small amounts of leverage, do not use so-called “cautious” leverage, and do not rely on stop-loss protections. Leverage strips away the core strength of this long-term strategy—the ability to withstand extreme market drawdowns of 50% without being forced to liquidate. Even if your long-term outlook over a ten-year horizon is completely correct, you could still be liquidated during a two-week plunge. The market does not compensate you for being right in the long term.

For the vast majority of people, a sensible asset allocation strategy involves a layered approach: maintain a portion of traditional assets to ensure security and peace of mind; allocate a significant portion of capital to long-term growth sectors, while keeping the position size in these high-volatility assets under control—so that even if their value drops by half, you won’t be forced into selling at a loss; the rest of your energy can be devoted to life.

Over the past thirteen years of observing the crypto market, I’ve found that investors who achieve long-term compounding are rarely those who trade frequently. During market crashes, drawdowns are a terrifying reality; but when viewed over a longer horizon, they are merely minor fluctuations on a chart. Doing nothing is itself a trading strategy, yet very few actually follow it—and it’s far more difficult than most realize.

If your assets' annual compound return is below the 11% benchmark, the freedom you can buy with the wealth earned through your labor this year will be less than last year.

Investors who understand this logic ultimately gain not a large sum of paper wealth, but optionality—the freedom to step away from constant market monitoring, the confidence to reject unfulfilling work, and the opportunity, while still young, to go where they desire and spend time with those they cherish.

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

I won’t provide you with a fixed asset allocation list. I don’t know your debt burden, investment horizon, or risk tolerance. Anyone who recommends a position allocation without understanding these three factors is essentially gambling with your money.

What I can provide you with is this set of screening criteria. Evaluate all of your assets against the benchmark of an 11% annual return. Regardless of how secure or comfortable you feel holding them, any asset that fails to outperform this benchmark is consuming your time and freedom.