Tim Pickering

As I read the constant stream of pundits explaining that stocks and bonds being positively correlated lately “destroys the idea of 60/40” or something like that, I think it’s a good time to remind everyone that bonds never mattered all that much in 60/40. Bonds, as almost everyone uses them in something like 60/40, are way less volatile than equities. Equities drive most of 60/40 returns. Bonds have some risk and some risk premium over cash (so 40 in bonds is a bit different, likely better long-term, than putting the 40 in cash). But they do not have enough volatility to really matter much, except, one would assume, in hyper-inflation (so it’s ok to worry a bit, but today’s modest positive correlation ain’t your real worry). Bonds, as they are conventionally used, dilute equities much more than they diversify equities. There is nothing wrong with diluting to reduce risk. But it’s not the same as serious diversification. And, of course, I include this self-serving reminder that there are in fact diversifying assets like trend following and market-neutral equities (and the same kind of reminder that calling a stock or bond “private” doesn’t diversify risk it hides it). Back to reading about the “Death of 60/40” even though the reports have been greatly exaggerated.