There is always a trade-off between the return sacrifice and diversification benefit a strategy brings to a portfolio. Long-dated bonds and treasuries in particular, have demonstrated strong diversification benefits in portfolio construction because of their negative correlation to other asset classes, like equities. This is in large part due to two factors: the interest rate factor that is negatively correlated with recessionary forces (including deflation) that drag other asset classes down and the safe haven status that is, well, positively correlated with fear. However, that correlation characteristic between treasuries and equities has been unstable over longer periods of time, vacillating between strongly positive and strongly negative since 1930.[i]
This is an excerpt from our article “What color is your parachute?” January 31, 2012
[i] Portfoliosolutions.com