Bonds in Your Portfolio
The 60/40 allocation, Treasuries as crisis hedge, TIPS for inflation, when bonds fail, and the Fed's toolkit
For four decades — from 1981 to 2020 — bonds were the perfect portfolio companion. Rates fell from 15% to near zero, generating massive capital gains for bondholders while providing crisis insurance every time stocks crashed. The 60/40 portfolio (60% stocks, 40% bonds) delivered equity-like returns with substantially lower volatility.
Then 2022 happened. The S&P 500 fell 18%. Bonds, supposedly the hedge, fell 13%.
The 60/40 portfolio had its worst year since 1937. Did something break permanently, or was 2022 an anomaly that actually revealed the conditions under which bonds fail as a hedge? The answer determines how every investor should think about fixed income going forward.
The traditional 60/40 portfolio rests on one assumption: that stocks and bonds are negatively correlated during crises. When economic growth falters, stocks fall (earnings decline) but bonds rally (central banks cut rates, driving yields down and bond prices up).
That is the opening. Finishing a lesson is where it stops being interesting and starts being useful: the full lesson runs to 8 sections and ends with 5 practice questions. A free account is what opens the rest, and the other 255 lessons in the Academy with it. No card.
What this lesson covers
- 1The 60/40 logic: why it worked for 40 years
- 2Bonds as crisis insurance: historical performance during equity drawdowns
- 3When bonds fail as a hedge: the inflation regime
- 4Stock-bond correlation shifts with the inflation regime
- 5TIPS: bonds that protect against inflation
- 6The Fed's toolkit and what it means for bond investors
- 7Bond strategy by macro regime
- 8Where to see this on the platform