Chart of the Month: Fixed Income Provides a Buffer Against Equity Market Sell-Offs

Market Observations:

While risk assets have done well over the last decade, particularly against fixed income investments in this low interest rate environment, it has been tempting to forget that bonds are a critical component of a diversified portfolio. The sharp equity correction late last year serves as a reminder about the role fixed income plays in asset allocation decisions. As a refresher, the primary role of a fixed income allocation in a multi-asset portfolio is to provide a buffer against equity market sell-offs and to generate income. As the chart above illustrates, the S&P 500 index declined by nearly 20% during the most recent equity drawdown, while fixed income played defense, providing diversification from equities and, in some sectors, generating a positive total return. As we enter the later stages of the U.S. expansion, it may be worthwhile to review one’s asset allocation mix to ensure it has some embedded resiliency, should markets become increasingly volatile in the months ahead.

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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