7 asset allocation myths it’s time to leave behind

Many investors assume that equities and bonds reliably move in opposite directions, relying on bonds to cushion equity drawdowns for steady diversification. That works, but only in certain environments. (See chart 2)

Stock–bond correlation tends to turn positive during high-inflation periods. When inflation runs above target, tighter monetary policy oftentimes pushes both stocks and bonds lower, moving in the same direction and eroding diversification.

Conversely, in low-inflation environments, bonds have typically cushioned equity drawdowns, restoring their diversifying power.

The relationship is not constant, but regime-dependent. Investors who look beyond the static two-asset framework tend to be better equipped to build portfolios that may hold up across cycles.

Tactical allocation is often misrepresented as bold, binary market timing. In practice, it's about something more nuanced: capturing return dispersion across markets, sectors, and regions. (See chart 3)

The gap between the best- and worst-performing equity markets has averaged 20–40 percentage points per quarter, highlighting a persistent, exploitable opportunity.

Rather than focusing solely on predicting the next major market shift, effective tactical strategies are continuous and agile with an emphasis on identifying and capitalizing on the rich, evolving dispersion that markets consistently offer. The opportunity set is far broader than most investors realize.

The efficient markets hypothesis says all available information is already priced in. Real-world data says otherwise. (See chart 4)

Market-implied inflation expectations have repeatedly diverged from actual outcomes, reflecting narrative and sentiment, not unbiased forecasts.

Even in deep, liquid markets, pricing often tracks prevailing narrative rather than fundamental reality. For active investors with the analytical discipline to spot these mispricings, inefficiencies continue to generate genuine return opportunities.

In the decade following the global financial crisis, cash mostly earned near-zero returns and was treated as a performance drag. Yet the sharp shift in rates changed that narrative. (See chart 5)

Cash has periodically outperformed global government bonds, particularly during periods of market stress or rising yields.

In a world of volatility and shifting yields, cash can contribute positively to risk-adjusted returns. How you manage it is no longer a passive decision: it's an active lever of portfolio construction.

It's natural to assume central banks act in broadly coordinated ways. But monetary policy cycles have diverged sharply in recent years. (See chart 6)

Policy rate dispersion has widened significantly, driven by differing inflation dynamics, growth outlooks, and domestic priorities across markets.

This divergence creates differentiation across yield curves, currencies, and equity markets, offering meaningful opportunities for active investors who can adjust regional exposures dynamically.

Market pricing doesn’t always track market sentiment closely. Interest rate expectations and central bank rate sentiment are an example of this. (See chart 7)

Recurring gaps between market pricing and Fed communications have foreshadowed policy surprises and volatility in rate-sensitive assets.

In 2022–2023, markets repeatedly priced in rate cuts even as the Fed signaled the opposite. These disconnects, driven by risk appetite and positioning rather than policy mandates, mean market prices alone are an incomplete guide to where policy is headed.