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My Correlation Is Broken. What Do I Do?
I'll confess to being a bit concerned by the ongoing incredulity exhibited by stewards of capital at the prospect of a positive stock-bond return correlation.
While acknowledging that you have to be fairly "old" to remember a time when building a diversified portfolio with uncorrelated assets actually required a modicum of skill and creativity, things that seem too good to be true usually (read: always) are. And the idea that two assets can be negatively correlated but rally simultaneously is a
I’m 78, and a shameless multi-asset investor with a portfolio consisting of 65% fixed income, a nice cash cushion and the rest in a mix of stocks. For the first 20 years my holdings were at least 90% in bonds, not because of any sense of bond-stock diversification, but for two other reasons. From the time the great bond bull started charging in the 20th Century, bonds, especially USTs selling at less than par, returned much more that stocks, especially when bought with a generous soupcon of other peoples’ money. The other reason for my choice is equally simple, borrowers sign contracts to pay you for using your money, and to pay you back at a stated time. Stocks don’t (and can’t) promise bupkis. I like promises people keep. The idea that for part of my investing life bonds diversified one’s portfolio when it contained stocks was a bonus. For much of the new century, ZIRP has killed bonds so I have gone up as high as 35% stocks. I still prefer promises kept, however, especially when they are tax-exempt. But now rates are up again and bonds are free to roam about the cabin. My investment income has risen YoY for all but one year of the current century so I will not be eschewing promises kept anytime soon. I’m now able to get FI vehicles at 25% discounts so once again, all is right with the world.