Traditionally, the answer for most investors has been a resounding yes. For decades, many benefited from the positive performance of the standard 60/40 portfolio (60% equities/40% bonds). But times change, and bonds may not provide the security they used to. We review the primary benefits of bonds, discuss which types are the best portfolio diversifiers, and when bonds can be most effective.
No hedge is perfect. In certain environments, stocks and bonds can become correlated and both decline in tandem. With this in mind, we show other ways to protect an equity portfolio when bonds don’t do the job.
- Retirees: Bonds often yield higher income than equities, making them attractive for retirees seeking regular cash flow. In addition to income, bonds offer diversification and reduce reliance on potentially volatile stock investments.
- Accumulating Investors: For those still building wealth, bonds’ main benefit is diversification, which can help smooth out the ups and downs of an equity-heavy portfolio.
- High-Quality Bonds (Especially Treasuries): A bond is a debt obligation of the issuer, such as the U.S. Treasury, U.S. agencies and corporations. High quality bonds have credit ratings of BBB or better by Moody’s or S&P. These bonds have historically provided strong diversification benefits, acting as effective ballast against stock market movements.
- Cash: Essentially short-term debt instruments with maturities under a year. Recently, cash has served as an excellent diversifier, sometimes even outperforming U.S. Treasuries in this role.
- High-Yield (Junk) Bond Funds: A high yield bond is a debt obligation of an issuer who is considered less credit worthy—with credit ratings of BB or below. Investors demand more yield to compensate for higher default risk. These bonds tend to move in tandem with equities, offering little diversification because their performance is closely tied to the overall health of the economy and corporate credit. While not ideal for diversification, small allocations to high-yield bonds offer a yield boost to U.S. Treasuries, currently 2.5% to 4%.
- Core and Core-Plus Bond Funds: These popular types of funds include more investment grade corporate and mortgage bonds and fewer Treasuries. They come with commensurately higher credit risk. While they are less effective diversifiers than Treasuries or cash, they provide somewhat higher income streams for retirees.
- There are two types of municipal bonds - general obligation bonds and revenue bonds. General obligation bonds are backed by the full faith and credit of the issuing state or city. Revenue bonds are backed by the revenue generated by a specific project or source, such as a utility, hospital or housing project. Typically, munis are not as strong as Treasuries or cash for diversification, and they mainly provide benefits for investors in high tax brackets. Over extended periods of time, municipal bonds have generally helped buffer equity volatility.
- U.S. debt levels are extremely high. Currently debt held by the public is 99% of GDP and growing.
- Higher debt means a larger supply of bonds, and increased supply likely means yields will have to rise to attract incremental investors. As yields rise, prices on existing bonds will fall, hurting existing bond holders.
- Further, Japan, China and the UK have recently been quietly selling U.S. Treasuries, putting downward pressure on bond prices.
- Some foreign bonds are now offering an attractive alternative to U.S. Treasuries.
- In higher inflation environments, bonds become more correlated to stocks. Bonds didn’t help protect stock portfolios in the 1970s inflationary period or during inflation in 2022. Further, bonds did not help portfolios in 2025 during the initial tariff shock in April or when Israel bombed Iran in June.
- This positive correlation between bonds and equities undermines fixed income’s value proposition as a portfolio diversifier. "This typically happens during inflation shocks stemming from eroded US institutional credibility, prompting a sell-off in both bonds and equities (as happened in the 70s when inflation ran away following fiscal easing and Fed subordination), or during negative commodity supply shocks that depress equity and bond returns through higher inflation and slower growth (as happened in 2022)." GS The Strategic Case for Gold and Oil in Long-Run Portfolios May 28, 2025.
- Hedging with both energy and gold helps to offset the effects of inflation.
- Traditional portfolios might hold 2–5% in gold.
- In periods of high equity/bond correlation or heightened macroeconomic risk, some investors increase this to 5–10%.
- The right amount depends on your risk tolerance, investment goals, and views on the macro environment.
- Developed economies like the U.S. have become less reliant on oil. It stands to reason that oil shocks will not have the effect that they had in the 1970s, but historically the correlation has been negative between bonds and oil.
- The current environment with high spare oil capacity, a willingness of OPEC+ to raise production and strong non- OPEC ex Russia supply growth also diminishes the need for overweighting oil.
- For our portfolios, we allocate to energy sources other than oil and hold a small oil stock position to hedge against the risks we have described in this blog.
- Holding long term positions in gold and energy buffers portfolio volatility when inflation, geopolitical instability, or falling institutional credibility disrupts markets.
- In the current environment, few seemed to be worried about oil supply disruptions until Israel bombed Iran today. Hedges are meant for these unexpected events.
- Adding oil and gold can help maintain resilience and reduce risk in changing market environments and when traditional diversification fails.
We maintain an overweight to energy stocks. Currently, we have a small position in oil, preferring natural gas and uranium.
The material included herein is not to be reproduced or distributed to others without the Firm’s express written consent. This material is being provided for informational purposes, and is not intended to be a formal research report, a general guide to investing, or as a source of any specific investment recommendations and makes no implied or express recommendations concerning the manner in which your specific accounts should be handled based on your individual circumstances. Any opinions expressed in this material are only current opinions and while the information contained is believed to be reliable there is no representation that it is accurate or complete and it should not be relied upon as such. Investing involves risk, including loss of principal, and no assurance can be given that a specific investment objective will be achieved.
The Firm accepts no liability for loss arising from the use of this material. However, Federal and state securities laws impose liabilities under certain circumstances on persons who act in good faith and nothing herein shall constitute a waiver or other limitation of any rights that an investor may have under Federal or state securities laws.
2x Wealth Group is a team at Ingalls & Snyder, LLC., One Rockefeller Plaza, New York, NY 10020.
There is no ‘one-size fits all’ answer to this question. Every recession or bear market is driven by a unique set of events, and the portfolio strategies that work best depend on the specific causes and the prevailing political and economic circumstances leading to the downturn.
Markets around the world are down today due to Trump’s unexpectedly punitive tariffs. These tariffs are feared to be inflationary and may cause a recession in the U.S. and abroad.
As Lenin famously said,” there are decades where nothing happens and weeks where decades happen.” We find ourselves in the thick of chaos, with daily political announcements and stock market gyrations. We anticipated volatility, but we got more than we bargained for.We work hard at fighting confirmation bias. In this blog, we attempt to understand different points of view and explain the steps we have taken in the current environment.
Deep Thoughts and DeepSeek
In 2024, much of the 25% equity market return came from multiple expansion. Earnings for S&P 500 companies only grew about 10%, but the amount investors were willing to pay for those earnings (P/E multiple) expanded by about 16%. Thus, about two thirds of 2024 equity performance came from multiple expansion.
In memory of famous investor Byron Wien, who was known for his list of 10 surprises each year, we provide our own list of potential economic, financial, and political surprises for 2025.
Is the Recent Runup in Chinese Stocks a Durable Rally or a Flash in the Pan?
In August of 2021, we decided China was un-investable and reduced our exposure to Chinese equities. In our blog “From Beijing to Wall Street” (here), we detailed our rationale.
Halloween Came Early
Ouch. Since August 1, the S&P 500 has fallen over 7%, a dramatic move, but not yet a correction from the July highs. However, the NASDAQ is down over 10% and firmly in correction territory.
What’s Happening Under the Covers
Why the U.S. Economy Has Remained Resilient in Spite of the Fed Raising Interest Rates and Reducing Their Balance Sheet
In memory of famous investor Byron Wien, who was known for his list of 10 surprises each year, we provide our own list of potential economic, financial, and political surprises for 2024.
If you just landed from Mars and we told you that three good sized U.S. banks had failed, the Federal Reserve had raised rates 5% in 13 months, the yield curve had been inverted since last year, the latest Senior Loan Officer’s Survey showed banks less willing to lend while already at recessionary lending levels, and according to Treasury Secretary Janet Yellen, we are within two weeks of the government running out of money to pay its obligations, would you believe the S&P 500 is up about 9% thus far this year?
How Banks Work
What Causes Banks to Fail
How the Government is Responding
How Bank and Brokerage Accounts May Be Protected
Dilemma for the Federal Reserve
We suspect most people think getting inebriated is more fun than sobering up.
We hate to sound like a broken record and ruin the party, but inflation presents a problem which won’t be easily fixed.
The four most dangerous words in investing are “this time is different”.
A Tongue in Cheek Guide to the Latest Investment Concepts
Mine your reward coins as you read our blog!
Who doesn’t love the story of David’s triumph over Goliath? This past week a group of “small” investors made tremendous amounts of money (on paper at least) by buying stocks that were heavily shorted by large, sophisticated hedge funds.
Markets hate uncertainty, and we can’t remember an election with such potential disparate outcomes. As we speak, the presidential race looks closer than ever, and the Senate majority is in question. Meanwhile the pandemic rages, and the President and Congress can’t agree on a stimulus plan. It’s no surprise stock market volatility has risen.
Fires are burning. The presidential election has never been more heated, and our whole election process is repeatedly questioned. The cold war with China continues to brew regardless of the political party in power. A global pandemic has taken hundreds of thousands of lives and jobs, created loneliness for our seniors, and caused those entering hospitals for medical procedures to endure alone.
He woke up today and asked us for an update. We explained there was a global pandemic that had claimed almost 400,000 lives worldwide and more than 100,000 in the United States.
How can we treat our ailing financial markets?
Medical experts say widespread lockdowns and social distancing must happen to contain the coronavirus and avoid overwhelming our hospital system.
the Coronavirus
Bombs and tweets couldn’t sink the S&P 500, but Covid-19 did.
While there is a role for gold in a diversified portfolio, gold is not universally liked or owned by investors and wealth managers.
The rates on overnight repurchase agreements, known as repos, suddenly rose above 9% last week.
We never really know where markets and the economy are headed, but market participants constantly look for clues.
Why does the current market tone feel different from the February and March stock market selloffs?
When do they protect you? When do they hurt you?
Worst Day Ever for the Dow Jones Industrial Average!
Perspective As the current bull market ages (from the bear market end in March 2009) investors are increasingly worried about buying at the peak.
The basic difference between a mutual fund and an exchange traded fund (ETF) is that an ETF trades like a common stock as its price changes throughout the trading day.
Brexit is spurring a flight to quality move into US Treasuries.
The short answer is yes.
