Diversification has become harder since 2020 as stocks and bonds tend to move in tandem during sharp selloffs, adding to financial stability concerns

Spreading investments across asset classes can reduce risk and smooth returns. The classic diversification between stocks and bonds worked historically because they moved in opposite directions. When stocks fell, investors sought safety in bonds. Bonds rallied, cushioning losses and stabilizing portfolios. 

Since the start of the pandemic period—with supply shocks that fueled inflation—bonds have become less effective in cushioning volatility in stocks. Instead of offsetting equity risk, bonds are increasingly moving in tandem with stocks. This shift is particularly…