Diversification: It’s one of the best things you can do for your portfolio. Exposure to different asset classes can reduce risk because each asset class reacts differently to market conditions.

But how differently do stocks and bonds really perform?

For the first time since October 2016, investors experienced negative returns (of less than half a percentage point) over a 3-month period in both the domestic stock and bond markets.* While a simultaneous loss in each asset class isn’t unprecedented, investors may question whether stocks and bonds move in opposite directions during extreme volatility—leaving them susceptible to the 4 most dangerous words of investing: “This time, it’s different!” **

Over the weekend, I looked at the stock and bond markets in the United States to see how unprecedented a simultaneous loss truly was. I observed the monthly returns for each of the last 30 years (plus the first quarter of 2018) to figure out how often investors had opened their monthly statements to see a loss of value in either asset class.

The results of my research surprised me.

Stock performance vs. bond performance

Of the observed 363 months, the U.S. stock market lost value in a given calendar month 126 times, while the U.S. bond market lost value 112 times.*** Although investors were almost as likely to see their bonds down in value as their stocks in any month, the severity was drastically different—the average stock market decline was –3.34% and the average bond decline was only –0.70%.

“Well, that’s all well and good, but how often do both stocks and bonds go down at the same time?” you might ask. The answer: probably more often than you’d think! Over the last 30 years, the U.S. stock and bond indexes lost value 48 times during the same 1-month period, and 25 times over a rolling 3-month period.

Of particular importance, a single economic event wasn’t responsible for the simultaneous decline. In fact, the decline occurred in a variety of economic circumstances, including:

  • Rising rate environments (1994, 2004–2006) and falling rate environments (1989–1992).
  • Periods of robust market returns (6 times during the late ’90s tech boom†) and periods of economic catastrophe (6 times during the 2008 global financial crisis††).
  • When the U.S. economy was the focal point of panic (3 times in 2000, during the “tech wreck”) and when non-U.S. markets were the center of an economic scare (3 times in 2015, during concerns about a possible “hard landing” in China).

While a simultaneous decline can happen anytime, there’s good news: Both asset classes experienced above-average returns when they recovered. During the 363 months I observed, the median return for the 12 months after the simultaneous decline was 12.17% for stocks and 8.18% for bonds.

Looking forward

Using the Vanguard Capital Markets Model® (VCMM)†††, we analyzed various economic indicators to project how future outcomes can vary for investors. We simulated 10,000 scenarios for each asset class over the next 10 years (2018–2027). Then we focused on the bottom 10% of the lowest-performing quarters for the global equity asset class for each simulation. The chart below shows how some popular hedging strategies performed during these periods of poor equity performance.

How popular hedging strategies performed when the global equity asset class performed poorly

Using this forward-looking approach, we found that inflation hedges like commodities and real estate investment trusts (REITs) failed to mitigate global equity volatility and were still susceptible to losses—to a lesser extent. Interest rate hedges like cash and short-term bonds produced only minimal positive returns.

Broad-based exposure to high-quality foreign and U.S. fixed income provided the greatest likelihood of positive returns to reduce global equity losses.††††

Relationship status: It’s complicated

No one can say which, if any, of the possible outcomes we simulated will become reality. While the classic inverse relationship between stocks and bonds appears to hold up in a majority of the simulations, there are still likely to be short periods when it doesn’t. But these exceptions to the norm shouldn’t lead you to abandon your long-term investment strategy.

Whether coinciding stock- and bond-market losses are a blip on the radar or a sign of things to come, your best bet is to stay the course and maintain an asset allocation in line with your goals and risk tolerance. Then rebalance your portfolio if it drifts more than 5 percentage points from your target asset allocation (or the markets might take the liberty of doing it for you!).

Finally, resist the temptation to make aggressive shifts in your investments or to look for a quick fix for equity volatility. (And, most importantly, don’t spend your weekend worrying about it!)

I’d like to thank my colleague Edoardo Cilla for his assistance with the VCMM projections.

*January 2018–March 2018 was the first period since October 2016 wherein both stocks and bonds ended a 3-month period in negative territory.

**Sir John Templeton, quoted in William Bernstein’s The Four Pillars of Investing: Lessons for Building a Winning Portfolio (2002).

***Measured by observing rolling quarterly returns from January 1998 through March 2018; benchmark for U.S.-based stocks was MSCI USA Index, and the benchmark for U.S.-based fixed income was Bloomberg Barclays US Aggregate Bond Index.

†Defined as the calendar years 1995–1999.

††Defined as the period between October 2007 and March 2009.

†††The VCMM is a proprietary financial simulation tool developed and maintained by Vanguard Investment Strategy Group. The model forecasts distributions of future returns for a wide array of broad asset classes. For more information about the model, refer to Vanguard Life-Cycle Investing Model: A framework for building target-date portfolios: Aliaga-Diaz et. al. (2016). IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each asset class and macroeconomic variable modeled. Simulations as of March 2018. Results from the model may vary with each use and over time.

††††While long-term U.S. Treasuries were the best performing asset class in this simulation, an overweight to this asset class can significantly increase interest rate risk within your overall portfolio.


  • All investing is subject to risk, including the possible loss of the money you invest.
  • Diversification does not ensure a profit or protect against a loss.
  • Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.
  • Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.