The longstanding negative correlation between stock and bond prices is an artifact of the low-inflation environment of the past 30 years. If inflation and inflation expectations continue to rise, investors will have to rethink their portfolio strategies to hedge against the risk of massive future losses.
NEW YORK – Rising inflation in the United States and around the world is forcing investors to assess the likely effects on both “risky” assets (generally stocks) and “safe” assets (such as US Treasury bonds). The traditional investment advice is to allocate wealth according to the 60/40 rule: 60% of one’s portfolio should be in higher-return but more volatile stocks, and 40% should be in lower-return, lower-volatility bonds. The rationale is that stocks and bond prices are usually negatively correlated (when one goes up, the other goes down), so this mix will balance a portfolio’s risks and returns.
NEW YORK – Rising inflation in the United States and around the world is forcing investors to assess the likely effects on both “risky” assets (generally stocks) and “safe” assets (such as US Treasury bonds). The traditional investment advice is to allocate wealth according to the 60/40 rule: 60% of one’s portfolio should be in higher-return but more volatile stocks, and 40% should be in lower-return, lower-volatility bonds. The rationale is that stocks and bond prices are usually negatively correlated (when one goes up, the other goes down), so this mix will balance a portfolio’s risks and returns.