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"A portfolio constructed for long-term resilience will be well served by a high-quality government-bond allocation, in particular one with US Treasuries and agency mortgages. The 2022 experience—as well as 2025 thus far—also illustrates the virtue of cash in a balanced portfolio, particularly for investors who are retired and actively drawing upon their portfolios for living expenses. While cash might not earn much over inflation over long periods of time, a modest allocation can provide both safety and liquidity when stocks and bonds fall simultaneously."
2 modifications of allocation/balanced funds have evolved:
1. It's OK to include "cash" in fixed-income. "Cash" broadly includes T-Bills, money-market funds, ultra-ST bond funds, short-tern CDs, stable-value funds (SVs) in 401k/403b.
2. Add some alternatives to the mix, so instead of 60-40, use 60-30-10. Some of these are called multi-asset funds.
From Morningstar's 2025 Diversification Landscape report (link in preceding article). I haven't read the entire 50+ page report.
Key Takeaways:
• The plain-vanilla version of a 60/40 portfolio (made up of US stocks and US investment-grade bonds) gained about 15% in 2024. Diversifying into other asset classes generally led to lower returns.
• Although broader portfolio diversification was a net positive during the 2022 bear market, the basic 60/40 portfolio, composed of US stocks and high-quality bonds, has been tough to beat over longer periods. A 60/40 portfolio improved risk-adjusted returns versus an all-stock benchmark in more than 83% of the rolling 10-year periods dating back to 1976.
• Correlations between the United States and other developed markets around the world have remained high while non-US stocks lagged by a wide margin through 2024, raising questions about the long-term value of international diversification.
• Over the past 20 years several asset classes—including corporate bonds, global bonds, high-yield bonds, municipal bonds, REITs, and Treasury Inflation-Protected Securities—have become more closely correlated with stocks. Many of these categories have also posted losses in periods of equity market stress. In such periods, Treasury bonds, gold, commodities, and some alternative investment strategies have been more compelling portfolio diversifiers.
• Diversification strategies that have worked in the past may not work in the future. In a period of rising interest rates and/or above-average inflation, Treasuries and other high-quality bonds would likely be less reliable diversifiers, although they still have merit as core portfolio holdings. The major shifts in US tariff policy announced in April 2025 have also added massive levels of uncertainty to the investment landscape, potentially upending many previously established performance patterns.
If things get bad enough the very highest quality bonds will shine - and the longer the duration the better. That was the case in ‘07-‘09 when the house nearly burned down (financially speaking). But they did little good in ‘22. Interestingly, DODBX (back in the ‘07-‘09 period, supposedly a 60/40 balanced fund) still gave away about 30% of its value as I recall. I recognize that it’s no longer the same fund today.
In good times holding high quality bonds of longer durations can be a real roller-coaster ride. I’ve not been able to hang tight while waiting for bonds to shine in some repeat of ‘08. I still like shorter duration bonds for the slightly higher yield over cash. I think there are some decent L/S or tactical allocation funds for folks trying to hedge risk.
Regarding DODBX, a new committee took over management of the fund in May 2022. The team made changes to reduce volatility and increase diversification. More international stocks were added as were short-term TIPS (new to the portfolio). The team also established an ongoing 5% short position in the S&P 500.
"If things get bad enough the very highest quality bonds will shine - and the longer the duration the better. That was the case in ‘07-‘09 when the house nearly burned down (financially speaking)."
Medium-term and long-term Treasuries have historically provided excellent diversification for equities. Christine Benz penned an article several years ago which showed medium-term Treasuries (5 year?) provided similar diversification benefits to long-term Treasuries with greatly reduced interest rate risk. These results were found to be true during the various time periods studied then.
That comports with what I've usually read about long term bonds. The additional yield that one gets on long term bonds doesn't adequately compensate for their amplified volatility. Long term bonds are more for traders (betting on interest rate changes), while medium term bonds are for investors.
I think that medium term bonds can have maturities out to 10 years. For example, from Schwab:
A bond term refers to the length of time between the date the bond was issued and when the bond matures. Bonds with terms of less than four years are considered short-term bonds. Bonds with terms of 4 to 10 years are considered intermediate-term bonds. Bonds with terms of more than 10 years are considered long-term bonds.
My reference to “longer better” was only when the house is burning down (2008). According to Yahoo Finance T.Rowe Price’s long term treasury fund PRULX gained 23.26% in 2008 while the overall category gained 27.67%.
Show me an intermediate term bond fund that did as well in 2008.
"My reference to “longer better” was only when the house is burning down (2008)."
@hank, Understood. I wasn't challenging your statement. My comments concerned diversification in general. Unfortunately, I didn't make this very clear. A 23.26% gain in 2008 would have been terrific to counterbalance horrible equity performance!
@msf, I previously saved the Christine Benz article from May 2019 locally on my computer (M* link now broken). Benz used the BBgBarc US Treasury 5-10 Year Index (MidT) to represent intermediate-term Treasuries. The BBgBarc US Treasury 20+ Year Index (LngT) represents long-term Treasuries. Correlation coefficients for the S&P 500 (SP500), Russell 2000 (R2000), and MSCI EAFE (INTRL) are listed below for periods ending 04/30/2019.
Comments
1. It's OK to include "cash" in fixed-income. "Cash" broadly includes T-Bills, money-market funds, ultra-ST bond funds, short-tern CDs, stable-value funds (SVs) in 401k/403b.
2. Add some alternatives to the mix, so instead of 60-40, use 60-30-10. Some of these are called multi-asset funds.
I haven't read the entire 50+ page report.
Key Takeaways:
• The plain-vanilla version of a 60/40 portfolio (made up of US stocks and US investment-grade bonds)
gained about 15% in 2024. Diversifying into other asset classes generally led to lower returns.
• Although broader portfolio diversification was a net positive during the 2022 bear market,
the basic 60/40 portfolio, composed of US stocks and high-quality bonds,
has been tough to beat over longer periods.
A 60/40 portfolio improved risk-adjusted returns versus an all-stock benchmark
in more than 83% of the rolling 10-year periods dating back to 1976.
• Correlations between the United States and other developed markets around the world
have remained high while non-US stocks lagged by a wide margin through 2024,
raising questions about the long-term value of international diversification.
• Over the past 20 years several asset classes—including corporate bonds, global bonds, high-yield bonds, municipal bonds, REITs, and Treasury Inflation-Protected Securities—have become more closely correlated
with stocks. Many of these categories have also posted losses in periods of equity market stress.
In such periods, Treasury bonds, gold, commodities, and some alternative investment strategies
have been more compelling portfolio diversifiers.
• Diversification strategies that have worked in the past may not work in the future.
In a period of rising interest rates and/or above-average inflation, Treasuries and other high-quality bonds
would likely be less reliable diversifiers, although they still have merit as core portfolio holdings.
The major shifts in US tariff policy announced in April 2025 have also added massive levels of uncertainty
to the investment landscape, potentially upending many previously established performance patterns.
In good times holding high quality bonds of longer durations can be a real roller-coaster ride. I’ve not been able to hang tight while waiting for bonds to shine in some repeat of ‘08. I still like shorter duration bonds for the slightly higher yield over cash. I think there are some decent L/S or tactical allocation funds for folks trying to hedge risk.
The team made changes to reduce volatility and increase diversification.
More international stocks were added as were short-term TIPS (new to the portfolio).
The team also established an ongoing 5% short position in the S&P 500.
That was the case in ‘07-‘09 when the house nearly burned down (financially speaking)."
Medium-term and long-term Treasuries have historically provided excellent diversification for equities.
Christine Benz penned an article several years ago which showed medium-term Treasuries (5 year?)
provided similar diversification benefits to long-term Treasuries with greatly reduced interest rate risk.
These results were found to be true during the various time periods studied then.
I think that medium term bonds can have maturities out to 10 years. For example, from Schwab: https://www.schwab.com/learn/story/what-are-bonds-understanding-bond-types-and-how-they-work
According to Yahoo Finance T.Rowe Price’s long term treasury fund PRULX gained 23.26% in 2008 while the overall category gained 27.67%.
Show me an intermediate term bond fund that did as well in 2008.
@hank,
Understood. I wasn't challenging your statement.
My comments concerned diversification in general.
Unfortunately, I didn't make this very clear.
A 23.26% gain in 2008 would have been terrific
to counterbalance horrible equity performance!
I previously saved the Christine Benz article from May 2019 locally on my computer (M* link now broken).
Benz used the BBgBarc US Treasury 5-10 Year Index (MidT) to represent intermediate-term Treasuries.
The BBgBarc US Treasury 20+ Year Index (LngT) represents long-term Treasuries.
Correlation coefficients for the S&P 500 (SP500), Russell 2000 (R2000),
and MSCI EAFE (INTRL) are listed below for periods ending 04/30/2019.
3 Yr___MidT_LngT
SP500 -0.23, -0.12
R2000 -0.33, -0.19
INTRL -0.15, -0.04
5 Yr___MidT_LngT
SP500 -0.28, -0.18
R2000 -0.31, -0.20
INTRL -0.23, -0.16
10 Yr__MidT_LngT
SP500 -0.37, -0.46
R2000 -0.42, -0.48
INTRL -0.31, -0.42
15 Yr__MidT_LngT
SP500 -0.28, -0.30
R2000 -0.33, -0.33
INTRL -0.23, -0.26