Correlation Between U.S. Stocks and Bonds
As of 31 December 2023. Source: PIMCO, Bloomberg Stocks represented by S&P 500 Index, Treasuries represented by Bloomberg U.S. Treasury Index. It is not possible to invest directly in an unmanaged index.
The portfolio examples below help illustrate the potential benefits of combining asset classes with low or negative correlations. The portfolio in scenario 1 is invested entirely in U.S. equities, while the portfolio in scenario 2 has a 70% allocation to equities and a 30% allocation to bonds. As shown in the average return and volatility (used as a measure of risk) data below the pie charts, having more than one asset class with low or negative correlations to each other (equities and bonds) can help lower volatility while still achieving solid growth.
What is the impact of globalization on correlation?
In today’s market, asset class correlations have become less stable than many investors realize. Long-term trends such as globalization have driven correlations higher.
In addition, correlations may increase during periods of market turbulence. As a result, seemingly distinct asset classes appear likely to behave more similarly than many investors expect.
This environment makes it more challenging to construct a truly diversified and resilient portfolio because assets that were previously unrelated can now represent exposure to the same risk factors.
How can investors implement asset allocation?
Professional investment managers help investors implement asset allocation using two methods –strategic asset allocationandtactical asset allocation. By using both in combination, the manager sets the long-term course for the portfolio and responds to short-term market drivers.
Strategic asset allocation, which provides the long-term focus for a portfolio, is based on three key factors: investment objectives, risk tolerance, and time horizon. Depending on the return targets and the level of risk that investors can tolerate, portfolios may be labeled as conservative, income and growth, growth, or high growth. Below are examples of hypothetical portfolios showing percentage of allocation targets for different asset classes.
Asset Allocation Portfolios
For Illustrative Purposes Only.
Source: Morningstar Mutual Fund Portfolios Asset Allocation Series 2023. The target asset allocation shown is based off the most recent reallocation date of 20 November 2023. Asset classes shown are determined by Morningstar, Inc. Category groups. The asset allocation reflects asset class weightings of the target portfolio. The actual asset classes and asset allocation may differ, in some cases substantially, from the percentages shown above. Neither diversification nor asset allocation ensure a profit or guarantee against a loss. Those asset classes noted may be known to be a growth engine, income producer, or volatility dampener, but there is no guarantee this will hold true.
