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By Opalesque:

The stock-bond correlation, which was reliably negative for much of the 2000s, has turned positive in recent years. This shift has sparked a wave of advice urging investors to dump bonds and replace them with other asset classes.

Cliff Asness, Daniel Villalon and Antti Ilmanen of AQR argue in a post that most of this advice is not only wrong - it's actively counterproductive.

The flawed logic making the rounds

The typical argument runs as follows: bonds now move in the same direction as stocks, so they no longer diversify a portfolio, so investors should sell bonds and replace them with something else. The "something else" has frequently been private credit, buffer funds, or even crypto - all of which, the authors point out, carry more equity risk than bonds, not less.

The diversification problem isn't new

The authors make a crucial point that gets lost in the noise: equity risk has always dominated traditional portfolios. In a classic 60/40 portfolio, a good or bad year for stocks almost entirely determines whether the overall portfolio is up or down - regardless of whether stocks and bonds were positively or negatively correlated. The diversification problem is not a new phenomenon born from the recent correlation shift. It has always been there.

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