In this three-part series, Will de Baer, Investment Director at Casterbridge, examines the BIG Investment Breakdown and what it means for client portfolios. As the traditional balancing relationship between equities and bonds has weakened, the diversification that many portfolios rely on has been quietly eroded. Will explores why this is happening, what history tells us, and how investors can respond.
The BIG Investment Breakdown
Part 1: When did bonds stop doing their job?
The breakdown of portfolio diversification and why it matters for your clients
When was the last time you looked at a client portfolio during a market sell-off and found it behaving exactly as you’d expect? That classic flight-to-safety trade, with equities falling, bonds rising, a natural cushion absorbing the blow, used to be something we could rely on almost unconditionally. It was the bedrock of the 60/40 portfolio. Diversification, effectively, for free.
To understand why that mattered, and why losing it matters even more, it helps to think about what the relationship between equities and bonds was actually doing for investors. When two assets are negatively correlated, they move in opposite directions. A fall in one is cushioned by a rise in the other, it’s the classic umbrellas and ice-cream analogy. It’s the portfolio equivalent of a shock absorber: smooth road or bumpy, the ride stays manageable. When correlation turns positive, that shock absorber completely disappears. Both assets rise together, and more importantly, both fall together. In the moments when clients most need the shock absorber, they get the opposite.
That relationship has broken down. At Casterbridge we call it the Big Investment Breakdown.
This isn’t a temporary glitch. The correlation between equities and bonds, which spent most of the period from the late 1990s through to 2021 in negative territory, flipped positive in 2022 and has remained there. Over the period from early 2022 to April this year, the average rolling three-year correlation between US equities and US bonds has been +0.42. At its peak in December 2024, it reached +0.65.
The consequences were stark. In 2022, the Global Aggregate Bond Index fell around 17%. UK gilts dropped 25%. The 60/40 benchmark lost around 12.5% in a single year. Equities and bonds fell in lockstep. The shock absorber seized up!
More recently, when the Middle East crisis escalated in March this year, the same pattern repeated. As equities pulled back sharply, gilts also fell 3.94% in the month and US Treasuries fell 2.05%. Again, bonds didn’t protect. They followed equities down.
The question every investor should be asking is whether this is temporary or something more enduring. A long-term analysis by Schroders, spanning equity and bond data from 1929 through to 2021, offers a useful and perhaps surprising perspective. Positive equity-bond correlation has actually been more common historically than the negative correlation we came to rely on between 2000 and 2021. That two-decade window was the exception, not the rule.
The 60/40 portfolio isn’t dead, however it is badly injured. Treating bonds as an unconditional, set-and-forget diversifier very much is dead. In Part 2, I’ll dig into the structural forces driving this shift, and the conditions under which bonds can still play a valuable role.