The notion that the traditional 60/40 portfolio is inadequate, especially in times of market stress, could stem from relying on risk diversification between equities and bonds.
In normal market conditions, and over the long term, the correlation between equities and bonds is near zero, or negative.1
In times of heightened market stress, however, such as the financial crisis of 2008, the Covid-19 related volatility in early 2020, or the increase in inflation and interest rate hikes of 2022, the correlation has been positive (and much higher), reducing the expected risk diversification. This can leave balanced portfolios “off balance” and may bring the validity of the 60/40 portfolio into question.2