When Old Rules Break Down, Consider a New Investing Approach
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For the past few years, we have been living in strange economic times. Signals that used to be solid indicators no longer correlate; even with strong inflation, consumer spending is strong; even with fears of recession, unemployment is historically low.
But one of the biggest breakdowns was in the relationship between stocks and bonds. Stock prices and bond prices are usually not correlated, meaning bonds can serve as the cornerstone of a hedge when stock prices waver and drop.
For most of the past two decades, that has been true.
In the past year, though, we have seen stock and bond prices move in a correlated manner. When both are rising, no one complains – but now that markets are seesawing, many investors are seeing, in alarm, that tandem rises are paired with tandem falls. If both asset classes move in the same direction, what risk management do bonds offer?
Stock-to-bond ratios are presented as the key indicator of how much risk is inherent in a portfolio: 80/20, 70/30, 60/40 – that’s all some people know about their holdings. When that ratio becomes less relevant, what’s an investor to do?