2022: the year stocks and bonds fell together, and what it teaches a tactical portfolio
For decades, the golden rule of diversification was simple: when stocks fall, bonds usually cushion. In 2022 that rule failed: stocks and bonds fell sharply at the same time. It is one of the most cited examples of why a static portfolio may not be enough.
What happened
After years of very low interest rates, inflation surged and central banks began raising rates quickly. That had two simultaneous effects:
- Bond prices fell. When rates rise, bonds already issued, paying less, are worth less. The longest-duration ones were hit hardest.
- Stocks fell too, especially the most rate-sensitive ones, because discounting future earnings at a higher rate reduces their value.
The result was that the classic 60% stocks, 40% bonds portfolio had one of its worst years in a long time. The guide on whether the 60/40 is dead covers the whole debate.
What it teaches
- Correlation is not constant. That bonds and stocks offset each other for years was not a law but a consequence of a low-inflation environment.
- Diversifying across asset classes is not the same as protection. Two different assets can fall together if they respond to the same factor, here interest rates.
- Safe assets are not all alike. Cash, short bonds, gold and commodities behaved very differently from each other.
The role of a tactical strategy
Momentum strategies aim precisely to react to regime changes. For example, HAA Balanced combines a momentum filter with a canary asset and can move to safe assets, including cash or short-term bonds, when the signal is negative. You can read the concept in the canary asset guide.
That said, no strategy avoids every drop:
- Monthly signals react with a lag and can exit late or re-enter late.
- A sideways market can create false signals and turnover costs.
- A single period proves nothing on its own. Read the risks of backtesting before drawing conclusions.
How to look at it in your own portfolio
- Check how much of your portfolio depends on interest rates, directly or indirectly.
- Check the duration of your bonds: the longer, the more sensitive.
- Ask yourself what your strategy would do with a negative signal on stocks and bonds at once.
- Look at each strategy's data in rising-rate years and compare with the 60/40.
This guide is informational, is not financial advice and does not predict the future behaviour of any asset.
Frequently asked questions
Will stocks and bonds fall together again?
Nobody knows. It is more likely in environments of inflation and rising rates, and less so in recessions with low inflation.
Are bonds still useful in a portfolio?
They can still play a role, but understand their rate sensitivity. Short-term bonds are less sensitive.
Would a momentum strategy have avoided the 2022 drop?
It depends on the strategy, the assets and the signal date. Check each one's history on the site, knowing the past does not guarantee future results.
Is cash a safe asset?
In 2022 it was one of the few assets that did not fall, although inflation eroded its purchasing power.