Do Bonds Really Offset the Stock Market’s Declines?

A common investor assumption is that bonds tend to go up in value when the stock market is sliding. That’s been true during the bond market’s long rally, and makes fixed income a common choice to diversify an equity portfolio.

However, there are two problems with that assumption. One, with today’s low yields on Treasuries and other bonds, the potential for fixed income to rally as stocks tumble appears limited. 

And two, what you may not know is that the bond market’s historical diversification benefit has been limited to large stock market declines. Horizon Investments’ research indicates that bonds don’t diversify equities until the S&P 500’s losses are 15% or more. And that’s true whether looking at Treasuries, corporate bonds or investment-grade debt.

Using bonds to offset run-of-the-mill declines for stocks is often, historically, little better than holding cash.

For goals-based financial planning in a low-yield world, Horizon Investments’ currently prefers active fixed-income management and bond-like alternatives to offset stock market volatility and provide income. For investors in the preservation phase, we offer the Risk Assist^® strategy, designed to protect wealth during market downturns.

Further reading:
If Inflation Returns, Bond’s Diversification Power May Disappear
Essentially Nothing. That’s How Much Bonds May Return Over Next Five Years
High & Mighty Stocks; Feeling Inflationary?; Game Stopped: Market Notes
Bond Market Bears Growling as 10-Yr Yield Tops 1%
It’s Getting Harder to Fund Retirement Using Bonds
7.9 Trillion Reasons Not to Fight the Fed, ECB, BOJ or BOE
The Stock Market Is Strange, But Not Broken by GameStop: Market Notes
In Current Markets, Only Two Words Matter: Stimulus Spending

This commentary is written by Horizon Investments’ asset management team. For additional commentary and media interviews, please reach out to Chief Investment Officer Scott Ladner at 704-919-3602 or sladner@horizoninvestments.com.

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