Buy stocks so you can dream, buy bonds so you can sleep—or so the saying goes. A wise investor will aim to maximise their returns relative to risk, defined as volatility in the rate of return, and therefore hold some investments that will do well in good times and some in bad. Stocks surge when the economy soars; bonds climb during a crisis. A mix of the two—often 60% stocks and 40% bonds—should help investors earn a nice return, without too much risk.
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Such a mix has been a sensible strategy for much of the past two decades. Since 2000 the average correlation between American stocks and Treasuries has been staunchly negative, at -0.5. But the recent rout in both stock and bond prices has wrong-footed investors. In the first half of the year the s&p 500 shed 20.6% and an aggregate measure of the price of…