The chart below shows the Risk return combination of several subasset classes over the last 5 years. The size of each bubble, shows the correlation of all those subasset classes to the S&P500. There are a few interesting observations: (1) long term bonds have been a bad investment, as one can expect in a period of persistent inflation. (2) the balanced portfolio (60/40) has provided a more than decent risk adjusted return, even when bonds (US Agg) have been positively correlated to the S&P500, and therefore a poor diversifier. (3) when Alts are added to the 60/40 mix, the risk return ratio improved 40%, and absent a big crisis, correlations to the S&P500 have been lower than bonds, providing some diversification benefits. (4) High Yield has been the only subasset class in fixed income to provide positive real returns. (5) gold has provided a better risk adjusted return than large cap growth, the big winner and finally, almost every asset class (except T bills) is positively correlated to the S&P500, and in most instances with a high coefficient.

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