Designed for steady risk-adjusted returns that lower portfolio volatility.
When investors seek low-correlated assets to build diversified portfolios, they make the key assumption that those low correlations will persist. Unfortunately, this is not always the case. One need look no further than the classic 60/40 stock/bond portfolio. For 20-year rolling periods since 1945 through 2013, (capturing data starting in 1926), on average, stocks and bonds have been uncorrelated – or -0.01, to be precise, according to Ibbotson.
But Exhibit A shows that the average masks a wide historical range over multi-decade cycles, including lengthy stretches of relatively high correlation, with that relationship varying from a high of just under 0.6 to a low of -0.4. While correlations in recent years have been at the low end of the range, the lesson is that for long-term portfolio construction, it is unwise to assume they will stay that way. Portfolio volatility may be higher than anticipated if correlations increase.
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