While I don't have a Ph.D. in finance, nor do I play one on TV, nor did I sleep at a Holiday Inn Express last night, it seems to me that 'betting the farm' (and I'm not insinuating that you have suggested doing so) on a negative correlation between long-term Treasuries and stocks 'during periods of market panic' would not be prudent. We don't have many such periods in the post-Volcker era to investigate, and even if there is a negative correlation during such a period, that does not capture the magnitude of any potential counter-balancing effect. For instance, when stocks dropped nearly 30% in a single week in October of 1987, Vanguard's LTT fund (VUSTX) slightly dropped in value over the same period. In the weeks immediately following the stock crash, LTT went up by about 11% but still managed to finish that year with a -7% real return. The only times in the last 50 years that I'm aware of where LTT had a strong counter-balance effect when stocks fell significantly were the 2000-2002 and 2008-2009 stock downturns, but that was in no small part due to a drop (or perceived future drop) in interest rates. Can that same effect occur when interest rates are so low? The convexity of bond returns indicates that it is possible, but will the Fed drop interest rates from their already record lows if the economy nosedives from here, or will they use other tools to accomplish their goals, including the repression of Treasury yields by buying trillions of dollars of them?prioritarian wrote: ↑Wed Dec 08, 2021 9:38 am Treasuries are often positively correlated with stocks so wealthfront is talking their book. However, the premise of risk parity is not that stocks and bonds are always negatively correlated but rather that during periods of market panic longer duration treasury bonds show extreme negative correlation with stocks. There is a large economic literature on this flight to liquidity and some examples can be found by searching my comments.
That said, I have a small stake in a version of HFEA, which is built on the premise of the negative correlation you're talking about. And apart from the negative correlation, I think that there is far too much attraction toward TBM around here and that many investors, especially those with 30+ year investment horizons, would be better served with LTT. But I would have a hard time counting on a negative correlation between stocks and LTT during 'periods of market panic' with a big portion of my portfolio. That's just me though.