Modern portfolio construction often assumes that stocks and bonds provide diversification through negative correlation. However, historical evidence shows this relationship is not stable. In periods of market stress, correlations can shift positive, reducing the effectiveness of traditional 60/40 portfolios.
Recent data highlights this shift. In 2022, stock-bond correlation rose to approximately +0.6 to +0.8, and both asset classes declined simultaneously. This marked one of the most challenging environments for balanced portfolios in roughly four decades.
A review of past crises shows that bonds did not always provide protection at the onset of stress, and in some cases, diversification failed when it was most needed.
The analysis suggests that effective diversification requires assets with structurally different return drivers, rather than relying solely on historical correlations between financial assets.