Suppose you began 2022 with $10,000: $6,000 tracking US stocks and $4,000 tracking a broad US bond index. You called the bonds your cushion. A $4,000 bill was due at the start of 2023. Could that cushion cover it?
The bond portion ended the year worth less than $3,500. Both markets fell, and the expected offsetting gain never arrived. Yet the bonds still reduced the portfolio's loss. Losing less and having enough for a bill turned out to be different jobs.
The Fed turned to fighting inflation
The Fed had kept interest rates low to support the pandemic economy. By early 2022, demand had rebounded while supply chains were still disrupted. Rising energy costs and Russia's invasion of Ukraine added pressure.
This was an inflation shock: an unexpected surge in price pressure. June's headline CPI-U, the US consumer price index including food and energy, was 9.1% higher than a year earlier. The Bureau of Labor Statistics released that reading on July 13.
The Fed raised rates to make borrowing more expensive and slow spending. Its target-rate history shows the shift from near zero to above 4% within the year. Low rates that had supported recovery no longer fit the inflation problem.
Both ends of the federal funds target range rose by 4.25 percentage points between the start of the year and the December decision.
Why both assets fell
An existing fixed-rate bond's interest payments do not rise with market yields. Buyers seeking a higher yield pay less for those fixed payments. Duration measures that price sensitivity: longer duration means a bigger response to a change in yields.
Stocks also get their value from money expected in the future. When investors demand a higher return, they pay less for the same expected cash flows. Payments far in the future are especially sensitive to that change, one reason stocks care about interest rates.
Different assets can share the same weak spot. In 2022, rising yields pushed down both benchmarks, despite their different claims on future income.
The benchmarks matter
The stock measure here is the S&P 500 total-return index. The bond measure is the Bloomberg US Aggregate Bond Index, a broad basket of investment-grade US-dollar debt. It includes Treasuries, corporate bonds and mortgage-backed securities.
These are calendar-2022 total returns in nominal US dollars: price changes plus reinvested income, with no deduction for inflation. They measure the full year, not the deepest loss along the way.
The bond label alone tells you too little. This index is different from cash, a single Treasury held to maturity or a fund of long-term Treasuries. A long-Treasury fund concentrates exposure to distant payments; a broad bond index spreads its holdings across maturities and borrowers.
The returns below come from the 2022 benchmark rows in iShares' IVV and AGG performance tables. These are the indexes' returns, separate from the funds' own results.
What the 60/40 split lost
Split the opening $10,000 into 60% stocks and 40% bonds. Reinvest each portion's income back into that portion, without moving money between them. Leave out deposits, withdrawals, fund fees and taxes.
| Holding | Start | 2022 return | End |
|---|---|---|---|
| S&P 500 | $6,000 | −18.11% | $4,913.40 |
| US Aggregate | $4,000 | −13.01% | $3,479.60 |
| Combined | $10,000 | −16.07% | $8,393.00 |
The dollar balances apply each index's return to its starting amount.
Add the ending balances: $4,913.40 + $3,479.60 = $8,393. The portfolio lost $1,607. Weighting the returns gives the same result:
That equals −16.07%, or about a 16.1% loss. Under the same setup, a single $200 split into $120 in stocks and $80 in bonds ends at $167.86.
The bond loss already includes its interest income. The payments arrived, but the fall in market value more than swallowed them.
Putting the entire $10,000 in the stock benchmark would have left $8,189. The mix left $204 more. Bonds softened the loss without making money themselves. The expectation that failed was an offsetting gain, not every benefit of diversification.
The cushion depends on the shock
In the 2008 financial crisis and the 2020 pandemic crash, threats to growth and the flow of credit pushed the Fed to cut rates. Falling yields can lift high-quality bond prices. In 2022, inflation pushed policy the other way. The source of trouble changes how the cushion behaves.
Correlation and diversification explain why two holdings need not move in opposite directions to be useful together. One year's matching losses do not measure how closely their returns moved along the way.
The bill makes the limit concrete. Your $4,000 bond portion ended at $3,479.60, leaving a $520.40 gap. Higher yields offered better future income, but paying this bill required cash at the fund's year-end price.
The job bonds have in your portfolio depends on their sensitivity to rates, the borrowers' ability to repay, and when you can turn the holding into cash. A single Treasury promises its face value at maturity. A broad bond fund does not promise to return your purchase amount on a fixed date.
This cushion helped the portfolio, but it could not cover the bill on its own. What a Century of Crashes Teaches carries that distinction into a broader check of an investing plan.
In short
- Inflation and rising rates hurt both major US stock and bond benchmarks in 2022.
- A bond fund can pay income and still lose value; it is not cash.
- This unrebalanced US 60/40 example lost 16.07%, including reinvested income.
- In this mix, bonds softened the stock loss without delivering an offsetting gain.
- Diversification changes risk; it does not promise a positive return or a fixed amount for a bill.