Stocks and Bonds Just Fell Together Again. History Says This Is What Investors Should Own When Diversification Breaks.

Over time, stocks and bonds generally exhibit a negative correlation. When one rises, it's not unusual to see the other fall.

But over long periods, those two asset classes can move together. From 1981 to 2020, the 10-year Treasury yield dropped from nearly 16% to less than 1%. This was the primary catalyst for the 60/40 portfolio. And it worked because both sides of the equation were delivering gains.

But in 2022, the relationship did the complete opposite. Inflation skyrocketed, long-term yields soared, and stock prices entered a new bear market. For the first time, both long-term Treasuries and the S&P 500 (SNPINDEX: ^GSPC) fell by more than 20% at the same time. Many people declared the 60/40 portfolio dead.

September 2026 looked a whole lot like 2022 all over again. The Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP) and the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) both fell by roughly 5%.

If stocks and bonds are falling together and traditional diversification doesn't look good, what are investors to do next? Approach diversification from another angle.

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Looking beyond bonds for diversification

Bonds can be a good risk diversifier when paired with stocks, but the relationship is inconsistent. And it's understandable if investors don't jump at long-term Treasuries, which are still more than 40% below their 2020 high.

The key to reducing portfolio risk through diversification is to pair equities with another low or negatively correlated asset class. And there are several to consider beyond just bonds.

Gold

This is perhaps the best risk reducer of all. Its long-term correlation with the S&P 500 is nearly zero, which means it's an asset class that kind of just does whatever it wants. If you need an asset that excels at risk reduction and has a bullish case due to fiscal concerns, gold might be it.

Commodities

Commodities have been one of the best-performing asset classes of 2026, mainly due to soaring crude oil prices. They can also be good to own during tense geopolitical periods when supplies can get strained, and prices rise. They have a higher correlation with equities than with gold, but still low enough that they're a good diversifier.

Real estate

Real estate, real estate investment trusts (REITs) in particular, trade much more like stocks but have several unique characteristics. Investing in land, apartments, or office buildings is different from owning a company. Plus, real estate faces different macroeconomic pressures than stocks. It's a good but not great diversifier when paired with equities.

Corporate bonds

In 2022, corporate bonds held up much better than government bonds, mainly because balance sheet health helped offset some of the pure rate risk exposure of Treasuries. If you're still looking to use fixed income as a diversifier for stocks, this isn't a bad alternative to Treasuries.

Don't abandon stocks and bonds

Over the long term, stocks, with their capital appreciation potential, and bonds, with their income profile, still pair well. There will be periods where they don't balance each other out as well as you'd like. But that doesn't mean you should abandon them as a pair altogether.

A small allocation to any of the alternatives mentioned could further diversify and broaden a portfolio and serve as a potential hedge against further increases in interest rates. When inflation and rates become a problem, they've shown that they're worth considering.

David Dierking has positions in iShares Trust - iShares 20+ Year Treasury Bond ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.