MORE investors fear the American stockmarket is overvalued than at any moment since 2000, according to Robert Shiller of Yale University. Recent research by Deutsche Bank, meanwhile, suggests that government bonds are as expensive as they have ever been. So it makes sense for investors to consider what assets they should buy to hedge against a sudden plunge in the value of equities or bonds.
New research by AQR, a fund-management group, looks at the ten worst quarters for global equities and government bonds between 1972 and 2014. On average, equities lost more than 18% during such quarters while bonds, a less volatile asset, lost 3.9%.
These two asset classes are often seen as complementary: the classic “balanced” portfolio comprises 60% equities and 40% government bonds. Shares are riskier and benefit from economic growth; bonds are safer but their value is eroded by inflation. The AQR numbers show that government bonds do act as a useful hedge for equities, earning an average return of 4.8% in the quarters when shares plummeted. That is good news: both assets may look overvalued but they are unlikely to fall in...Continue reading
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