As the Dow Jones Industrial Average DJIA, -0.87% and S&P 500 index have fallen more than 5% from their recent highs, investors have rushed toward safety. Funds that aim to lower risk and limit stock market losses raised almost $10 billion in the first four months of 2019, The Wall Street Journal reported.
But there’s a much simpler, cheaper way to hedge your stock-market investments — bonds. And they’ve been the most effective way to do that for more than a decade. Recently, haven buyers have scooped up 10-year Treasury notes TMUBMUSD10Y, -0.11% , driving yields down a full percentage point since last October, to as low as just above 2.20% at one point Wednesday.
New research by Christine Benz, Morningstar’s director of personal finance, confirmed the superiority of bonds — especially Treasurys — as hedges over the long run.
Benz looked at asset classes traditionally considered stock-market hedges over different periods, from one year to 15 years. She used Morningstar Direct’s database and stuck mostly to funds and ETFs available to institutional and individual investors.
Benz looked at the correlation coefficient between different pairs of asset classes over time. That’s a number between -1 and 1 that measures how closely two variables move together. A correlation of 1 means the two are perfectly in sync, 0 means no correlation, and -1 means the two are going in the opposite direction. In short, it tells us how much other assets have zagged when stocks zigged, and vice versa. Ideally, to hedge your equity risk, you’d want something that has as negative a correlation with the S&P 500 as possible.
“The goal is when stocks tumble, that you have something in your portfolio with the ability to at least hold its ground, or maybe even earn a little bit,” said