Stacy Francis Featured Article on Forbes on When Stocks and Bonds Miss Expectations
By: Stacy Francis
December 29, 2022
Stacy Francis, President and CEO of Francis Financial shares why usual strategies of diversification took a turn for the worse in 2022.
One long-held truth in investing is the importance of diversification. For decades, portfolio diversification, both across asset classes and within asset classes, has been considered key to successful investing. In 1952, Nobel Prize laureate and economist Harry Markowitz said, “Diversification of asset allocation is the only free lunch” in investing. One way of taking advantage of this free lunch has traditionally been investing in both stocks and bonds (diversification across asset classes, or types of investments). This usually works well as, although stocks generally outperform bonds, stocks also tend to have more ups and downs than bonds. Also, bonds may increase in value when stocks drop, and vice versa. We trust bonds to provide a measure of security in challenging times, and we rely on stocks to increase portfolio returns when markets climb. Stocks and bonds are a complement to each other, akin to the peanut butter and jelly in that free lunch. However, in 2022, that nice complement suddenly took a turn for the worse, leaving us all wondering what happened to the classic diversification strategy of relying on bonds to offset the downturns and volatility of stocks. What went wrong?