October 19, 2026

When the Cushion Moves: What Steadies a Portfolio When Bonds and Shares Fall Together

by Ewen Emmerson

in Insights Research

A follow-up to “The Quiet Cost of Borrowing”: why diversification depends on the kind of shock, and what new research says about a third source of stability.

A BCM Investment Insight, by Ewen Emmerson

In August we wrote about the quiet cost of borrowing, and about one of its less obvious consequences: that government bonds, long relied upon to cushion a portfolio when shares fall, cannot always be counted on to do so. When the shock is a sharp move in interest rates themselves, bonds and shares can fall together. Two days this autumn showed both sides of that idea more clearly than any chart, and they are worth a closer look, along with a recent piece of research on what else can help.

Two days, two different shocks

In late September, bond yields jumped as investors priced in further interest rate rises to counter inflation from higher energy prices. On that day shares fell, government bonds fell, and gold, so often described as a safe haven, fell sharply too. Almost everything a cautious investor might hold moved in the same direction at once.

A little over two weeks later, the picture reversed. Inflation figures in the United States came in higher than expected, and at first bond yields rose again. But within hours, worries about the valuations of companies linked to artificial intelligence took over. Shares had their worst day since the summer, and government bonds rallied strongly, with the US ten-year yield falling by around a quarter of a percentage point in less than a day. This time, bonds did exactly what a balanced portfolio expects of them.

The difference was the nature of the shock. When the worry is inflation and interest rates, bonds are part of the problem. When the worry is growth or company earnings, they are part of the solution. Since our August piece, the evidence has also become clearer on why yields have risen across the developed world: central banks responding to inflation from higher energy prices have been the main driver, with competition for capital an important but secondary part of the story. For as long as inflation remains the dominant concern, bonds are likely to offer less reliable protection than investors grew used to.

A third leg

If bonds cannot always be relied upon, the natural question is what else can do some of the work. The answer is not simply to own more things, but to own things that respond to different forces. Shares respond above all to company profits. High-quality government bonds respond to interest rates and growth. A third group of assets, including gold and other real assets, responds to something else again.

Gold is the clearest example. As we wrote in July, it is not the simple fear gauge it is often portrayed as, and for a long time its price was closely tied to real interest rates. That link has weakened in recent years, as central banks have bought gold steadily and in large quantities; China’s central bank has now added to its reserves for nearly two years without a break. The result is an asset whose price has, over recent years, moved largely independently of shares and bonds. That independence, rather than any promise to rise whenever markets fall, is what makes it useful. On the day in September described above, it did not help. Over longer periods, its different behaviour has.

The same logic applies more broadly. An energy shock, for instance, tends to hurt both bonds and shares, because it raises inflation and squeezes profits at the same time. Assets tied to physical resources can behave quite differently in those conditions.

What the new research shows, and what it does not

A paper published in September by Devanathan, Tzikas and Boyd, whose senior author, Stephen Boyd, is a professor at Stanford University, tested exactly this idea using US market data. Its findings are instructive, partly because the authors were so candid about their own limits.

The robust result was the simple one. A portfolio holding shares, bonds and gold, rebalanced to keep its overall level of risk steady, delivered noticeably better returns for the risk taken than the traditional mix of shares and bonds: almost half as much again, with far more consistent swings in value from one year to the next, and with only moderate trading.

The authors also tested a more sophisticated version, which traded frequently in an attempt to anticipate changes in markets. On paper it looked better still. But on the authors’ own more demanding statistical tests, its advantage could not be reliably distinguished from chance. It turned over its holdings nearly three times a year, and once tax was taken into account, using the top US rate, most of its apparent edge disappeared.

That is a useful lesson in its own right. The value came from owning assets that behave differently and holding them with discipline, not from clever, frequent trading. The research was based on US markets in US dollars, and past results are no guide to the future, but the principle travels well.

How we think about it

Diversification is not a fixed property of an asset; it depends on the storm. A portfolio built only of shares and bonds is well protected against some storms and poorly protected against others. Adding assets driven by different forces widens the range of conditions in which something in the portfolio is doing its job, though it also means accepting that, in any given month, one part or another will disappoint. Gold’s fall in September is a reminder of that.

None of this argues for constant activity. If anything, the research points the other way: the costs of trading, and of tax, steadily erode the benefits of trying to be clever. Owning a sensible mix of different assets, and keeping it in balance, has been the more reliable path. Perspective, not prediction.

If you would like to discuss how diversification works within your own portfolio, please contact us to arrange a conversation with one of our advisers.

This article is for information only and does not constitute personal advice or a recommendation to buy or sell any security, fund or index. The value of investments can fall as well as rise and you may get back less than you invest. Past performance is not a guide to future returns.