The Changing Correlation Between US Stocks and Bonds and the Need for Diversification

For years, investors have relied on the traditional 60/40 stock/bond portfolio model to balance risk and return. However, recent market dynamics have highlighted the need for better diversification, particularly through assets like private real estate.​

The environment for both inflation and interest rates has fundamentally changed. Historically, U.S. Treasuries were viewed as a safe haven during market volatility, but recent selloffs have sent yields soaring, marking the largest change since the 1980s. This shift has intensified the correlation between US stocks and bonds, reducing the protective benefits of the 60/40 portfolio.

Research shows that in a rising interest rate environment, stocks and bonds tend to move in the same direction. This trend is expected to persist as long as the outlook for inflation and interest rates remains uncertain.​ 

Given these changes, investors are increasingly looking towards alternative investments to diversify their portfolios, with private real estate being a particularly common choice given its:​

• Low Correlation to Stocks and Bonds: Private real estate has historically shown low correlation to traditional asset classes, providing a hedge against market volatility.​
• Consistent Income and Growth Potential: With rental rates generally outpacing inflation, private real estate can offer stable income and growth.
• Relatively Lower Volatility: Compared to portfolios without private real estate, those that include it tend to experience lower long-term volatility.

Incorporating private real estate into a portfolio can improve returns while lowering volatility. It has generally outpaced inflation and outperformed equities and bonds in high inflation periods. In fact, for the trailing 20 years through Q4 2024, a 15% private real estate allocation would have increased total return, reduced volatility by 8.4%, and increased returns during inflationary periods by 195% when compared to a traditional 60/40 stock/bond portfolio.

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Public REITs are another liquid way for investors to get real estate exposure. However, REITs are stocks that trade on stock exchanges and will typically become highly correlated with the broader equity market during periods of market stress, which means REITs don’t provide much diversification benefit to a portfolio.​

In conclusion, the changing correlation between US stocks and bonds underscores the need for diversification. By including assets like private real estate, investors can better navigate market fluctuations and achieve more balanced portfolios.​

IMPORTANT DISCLOSURES

1. Sourced: IDR, as of Q2 2024.
2. As of April 2024
3. The fund will invest in the underlying component funds of the NFI-ODCE Index that comprise a material NAV of the overall index.

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NCREIF Fund Index – Open End Diversified Core Equity (the “NFI-ODCE Index”). Indexes are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. 

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Past Performance does not guarantee future results. Therefore, you should not assume that the future performance of any specific investment or investment strategy will be profitable or equal to corresponding past performance levels. Inherent in any investment is the potential for loss. It should not be assumed that any investments in securities, companies, sectors, or markets identified and described in this content were or will be profitable. Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

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