Historically, stocks and bonds have acted as natural hedges against each other. While diversifying a portfolio within those major asset classes can’t eliminate risk, it can help reduce volatility and may improve risk-adjusted returns¹ over the long term.

The matrix below shows how different assets are correlated to each other. Sometimes, the correlation between equity asset classes and fixed-income asset classes is low. In some cases, they are negatively correlated—when one asset falls, the other often rises (i.e., U.S. large-cap stocks vs. long-term Treasury bonds). This shows the benefits of also diversifying within asset classes. Different sectors, market caps, styles or regions can have different return characteristics.
 

The graph below shows the return and the risk (standard deviation²) of the broadly diversified Morningstar Target Risk indexes. By combining numerous asset classes with different correlations to each other, the indexes have been able to produce varying risk-reward profiles.

The Morningstar Target Risk Index family consists of five indexes covering risk preferences ranging from aggressive to conservative. The indexes utilize asset allocation methodologies developed and maintained by Morningstar Investment Management to determine underlying index weighting. Results shown assume reinvestment of dividends or interest.
 

Talk with your financial professional about building, balancing and diversifying your portfolio with Thrivent mutual funds.