For decades, one simple allocation became the default, most widely referenced answer to "how should an ordinary investor be invested": the 60/40 portfolio, holding roughly 60% in stocks and 40% in bonds. The rationale behind this specific combination wasn't arbitrary — it rested on a real, historically observed pattern: stocks and bonds have often shown low or even negative correlation, particularly during stock market downturns, meaning bonds could provide genuine diversification and downside cushioning precisely during the periods when stocks were falling and an investor needed that cushion most. This pattern held up across many historical stock market declines, reinforcing 60/40's reputation as a sensible, balanced default allocation for decades.
2022 became a genuinely notable, widely discussed challenge to that classic assumption. Both stocks and bonds declined significantly during the same year — a relatively unusual simultaneous decline that undercut the traditional expectation that bonds would reliably cushion a stock downturn. The mechanism connects directly to a concept covered elsewhere on this platform: the inverse relationship between interest rates and bond prices. As the Federal Reserve raised interest rates aggressively throughout 2022 to fight inflation, existing bonds carrying lower, previously-locked-in fixed rates became meaningfully less attractive, causing bond prices to fall — at the very same time that those same aggressive rate hikes were also pressuring stock valuations downward, a genuine double-hit that the classic 60/40 diversification logic hadn't specifically anticipated.
Correct moves you up, wrong moves you down — reach 100 to master this lesson.