Correlation Breakdowns
When safe havens fail: the myth of the 60/40 portfolio during inflationary crises.
The Core Pitfall
Investors rely on bonds to go up when stocks go down. But in 2022, high inflation caused both stocks and bonds to crash simultaneously.
Why It Happens
Correlations are dynamic, not static. During liquidity crises, the correlation of all liquid risk assets goes to 1.
⚠️ Key Warning
Do not assume historical negative correlations will hold during structural paradigm shifts.
How to Protect Yourself
- Recognize the trap: Understand the mechanics before you invest.
- Risk Management: Always size positions according to maximum potential loss.
- Stay Disciplined: Stick to your long-term plan and ignore market noise.