Bad News For Investors: This Return-Boosting Trend May Soon Be Consigned To History

Bad News For Investors: This Return-Boosting Trend May Soon Be Consigned To History
Andrew Rummer

almost 3 years ago1 min

The past two decades have provided an unusually benign backdrop for investors, with stocks and bonds exhibiting a negative correlation where losses in one were generally offset by gains in the other. 

As the chart above from money management giant PGIM shows, stock-bond correlations have been lower since the turn of the century than for most of the period from 1950 to 2000 – meaning a classic investment portfolio of 60% stocks and 40% bonds was almost guaranteed to do well.

Unfortunately for investors, PGIM argues in a new report that many of the current shifts in government and central bank policy – from rising budget deficits to governments exerting more control over interest rates – may well push these correlations back into positive territory. 

Greater correlation between stocks and bonds removes a natural hedge in investors’ portfolios and leaves them with an unenviable choice: either accept lower returns or face larger swings in the value of their portfolio (a.k.a. increased volatility). 

Or, to put it another way, rising stock-bond correlations will hit your returns for a given level of volatility. So best hope the 21st century trend of negative correlations continues and we’re not entering a new era following the coronavirus pandemic.

Chart of portfolio returns compared with stock-bond correlations
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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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