Oh when I was a kid, I got no respect. I played hide and seek. They wouldn’t even look for me.

– Rodney Dangerfield¹

For a number of years, I’ve been having conversations, particularly with financial advisors, about portfolio construction. The specific focus of interest is often what I (Vanguard) think about the inclusion of various asset (or sub-asset) classes in client portfolios. Whether it’s REITs, commodities, hedge funds, you name it, I’ve had discussions about it. The common thread is that they were all looking for diversification. My instant thought is, “What’s wrong with bonds?”

Like the late comedian Rodney Dangerfield, bonds suffer from a chronic lack of respect. It seems that everyone is “playing hide and seek,” searching for the “best” diversifiers to include in client portfolios, and they aren’t even looking for bonds.

In my discussions, I typically reserve judgment on the various investments being asked about and whether they are suitable. I generally fall back on our research, which relies on probabilities of success. Often I will show a chart, similar to the one below, that demonstrates various investments’ track records during turbulent periods for the equity markets. Specifically, if we sort monthly equity returns into deciles and examine the worst periods, we find that high-quality bonds² have proven to be one of the best diversifiers for a portfolio. That’s pretty impressive, especially compared with the other asset classes that I get asked about, none of which has provided downside protection when investors arguably needed it the most.