Morningstar - Q2 2023 - 31

EXHIBIT 4
Greenspan Put The Fed's accommodative policies in the late 1990s brought
negative correlations between bonds and stocks. Before then, correlations between
the two were higher.
1.0
0.5
-0.5
-1.0
Positive Correlation
Negative Correlation
01/31/1988
01/31/2000
Note: Rolling 1-month correlation beween S&P 500 and Bloomberg US Aggregate Bond.
Source: Morningstar Direct. Data as of March 31, 2023.
01/31/2012
03/31/2023
-0.49
" If I ask investors, 'What's the fastest way
to get from L.A. to San Francisco?' a lot of them
would choose some kind of race car, " he
says. " But race cars are hot, loud, and they lack
cushioning. Race car drivers come out of
a couple hours of racing looking like they've
been in a fight. "
adjustments to current market conditions-
tends to be short term and driven by
market events.
Strategic asset allocation-long-term
stock and bond mix, determined by an investor's
risk tolerance and time horizon-can often
be forgotten.
" There's an old perception that strategic asset
allocation doesn't have to change very
quickly, " Li says. " But in this time of greater
volatility, even strategic asset allocations
have to change quickly. "
In addition, Li says investors would be well served
to think more broadly about the types of
investments that make up a diversified portfolio:
" We should talk about alternatives: private debt,
commodities, infrastructure, inflation-linked
bonds ... not just your typical global bonds and
global equities. "
Overall, though, while the specific percentage
of bonds versus equities in a portfolio will
matter more than before, and that subthemes like
inflation protection and private-market exposure
are important, Li believes that the basic principle
of diversification will still hold. When
it comes to stocks versus bonds, " either-or will
go up, not both at the same time. "
Li adds that the role of duration as a recession
hedge " needs to be scrutinized, as central banks
cannot cut rates to come to the economy's rescue
in the face of persistent core inflation. " Over a
long-term investment horizon, stock-bond
diversification will hold because " the choice of
central banks in the face of tougher trade-offs will
affect either equities or bonds, " not both.
Diversification Will Still Work, Most of the Time
An important lesson from 2022, says
Vanguard's Schlanger, is that " the 60/40 is a
long-term strategy. With any long-term
strategy, you're not expecting it to insulate you
from losses altogether. "
Schlanger's research shows that when expanding
the period to five-year intervals, the 60/40
has experienced losses only 0.1% of the time.
Given all that, " When we take the losses of
2022 into account, " he says, " the outlook for
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31
Queen says that even race car drivers would
need to get off the road when the going
gets tough. The most important thing is to
stay on the road over the long term. " You need
a strong windshield, air conditioning, and
comfortable seats: These things slow you down,
but they make the ride comfortable. To stay
diversified over the long term, you need bonds
to smooth out the ride. "
Some investors can accept a rougher road
than others, Queen says, but balance serves
most everyone. " Whether diversification means
60/40 or 80/20 or 20/80 depends on the
investor, " he says. " But diversification smooths
the road. " K
Lauren Solberg is a data journalist at Morningstar.
She covers market trends, inflation, and other
macroeconomic news.
the 60/40 is better than it has been in over
a decade. "
Capital Group's Queen has strong faith in the
continued value of diversification: " We had
a bad year in the markets, so it was a bad year
for the 60/40. Does balance suddenly not
make sense? Does diversification suddenly not
make sense? To me, it still does. "
Queen uses the analogy of highway driving to help
investors understand the importance of owning
bonds within a balanced portfolio. Investing is like
driving, he says, and many investors seek the
highest return, the fastest.
Stock/Bond Correlations
https://www.morningstar.com/authors/2446/lauren-solberg http://www.morningstar.com/products/magazine
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