Key Takeaways

• Treasury yields have risen at a time when we might think that they would fall.
• Another bond-related lesson is that some bonds have basically behaved as much like stocks as they have bonds.
• The recent market rout has underscored the importance of valuation.
• It’s been a long stretch of underperformance from non-US stocks, so it’s welcome to see them delivering some diversification benefit to US investors.
• Gold is volatile, so keep it to a fairly small position in a portfolio.

Margaret Giles: Hi, I’m Margaret Giles of Morningstar. The recent tariff-related volatility has reinforced some familiar lessons for investors’ portfolios while upending some others. Joining me to discuss five key lessons from the recent market turmoil is Christine Benz. Christine is Morningstar’s director of personal finance and retirement planning, host of The Long View podcast, and author of the bestselling book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement.

Thanks for coming, Christine.

Christine Benz: Margaret, it’s great to see you.

Why Treasury Yields Have Risen Unexpectedly During Recent Market Volatility

Giles: So, one of the most unsettling pieces of this recent volatility has been that Treasury yields have risen at a time that we might think that they would fall, right? So what’s going on there, and what should we take away from it?

Benz: Right. You’re absolutely right, Margaret, that it has been unsettling because Treasuries and stocks are oftentimes a really reliable pairing where they tend to behave in different ways. And that’s especially true when people are concerned about recession. We often see stocks slump during a period like that, whereas Treasury bonds will gain in value. We’ve seen a little bit of a bobble in terms of Treasury prices recently. Their yields have been rising. And the reasons are, I think, still being digested, but a couple of ideas out there would be that even as investors are concerned about recession, they’re also concerned about inflation, and that could mean higher interest rates down the line. So, that is one potential explanation for why we’ve seen Treasury prices move as they have.

Another is perhaps a more ominous concern that investors are just concerned about US policy and are retreating from US assets during this period. And so that has been a headwind. One point I would make here though is that perspective is super important. So, even though Treasury bond prices haven’t been exactly what we would have hoped on those really down days for the stock market, Treasuries and bonds, in general, high-quality bonds in general, are still holding up quite well relative to stocks. So, as we’re taping this in late April 2025, the US stock market is down about 10%. Well, Treasuries are in positive territory for the year-to-date, even long-term Treasuries. And if you have some sort of a core bond fund, you’re probably in the black there, too. So, I wouldn’t get too worked up about the short-term performance pattern, and I would also say it’s not unprecedented, that we had a similar bobble in Treasury bond prices at the early stages of the pandemic, and yet Treasuries went on to recover really well during that period.

How Investors Need to Think of Fixed-Income Allocation During Market Volatility

Giles: That’s very helpful context. So another bond-related lesson is that some bonds have basically behaved as much like stocks as they have bonds. So, how should that affect how investors think about their fixed-income allocation?

Benz: Right. We’ve seen lower-quality bonds, whether high-yield bonds or floating-rate or bank-loan investments, multisector bond funds, have mostly had small losses for the year to date, and that is a familiar pattern, where in periods where investors are worried about the strength of the economy they’re worried about stock, stock prices, or worried about future stock prices, they’re often ditching these lower-quality bonds at the same time.

And so to me, I think it’s just a great reminder to, you know, to the extent that you have some of these lower-quality bonds in your portfolio, relegate them to the margins of your fixed-income portfolio. If you are looking for something that truly diversifies equity exposure, look to cash, look to high-quality fixed-income investments. You might hold high-yield or bank-loan investments around the margins of your portfolio, but they should be fairly small positions.

Why Investors Need to Diversify Across Style Boxes During Market Volatility

Giles: OK. So let’s move over to equities now. You note that the recent market rout has underscored the importance of valuation. So, how so, and what should investors think about that?

Benz: Right. When you look at our Markets cover page on morningstar.com, you can see how the various segments of the style box have performed year-to-date, and it sends a pretty clear message that that growth column of the style box has been the high-risk area. It’s been where the biggest losses have been year-to-date. And what did we know coming into 2025? Well, we knew that those, segments of the market were also pretty expensive coming into this year.

So, that is a very familiar pattern with stock market selloffs. It’s oftentimes those highest valued stocks that get clocked the hardest. And we’ve seen the value column of the style box, especially large-cap value, less so the smaller-cap value for sure, but large-cap value has held up relatively well, I think in part because they’re large-cap, so they’re generally higher-quality companies, and they were cheaper coming into this period. So naturally, they’ve held up a little bit better.

So, I would say it’s just a good reason to make sure that you diversify across the style box for investors who are holding more finely tuned market exposures in their portfolio, either through individual stocks or ETFs or funds. Just make sure that you’re doing that periodic rebalancing. If you were doing regular rebalancing, you probably would have skinnied down some of those parts of the style box that have been particularly hard-hit year-to-date.

Why Investors Should Maintain Global Diversification

Giles: So, speaking of diversification, the next lesson has to do with international diversification. So, what should investors take away from the fact that non-US stocks have outperformed for the first time in a while?

Benz: Yes, definitely. It is, it’s been a long stretch of underperformance from non-US stocks, so it’s welcome to see them delivering some diversification benefit to US investors. A co-couple of things going on there. One is that the stocks have performed relatively better than US companies, but also as an investor in non-US stocks, you also have a little bit of a currency effect there, so you have the gain or loss of the stock itself, but you also have the foreign-currency translation, so we’ve seen the US dollar generally lose a bit of value this year relative to many foreign currencies, so you’re picking up that benefit as well.

I would say that foreign stocks still have a long ways to go to atone for what had been a long stretch of underperformance, but it’s not at all unprecedented for non-US companies to outperform US for a long period of time. In fact, we had a similar period in the 2000s where from 2000 through 2009, where non-US stocks really outperformed US by a pretty good margin. So, I’m a believer in investors maintaining global diversification. I think it’s just another source of diversification in a portfolio, and I believe that investors should maintain that exposure on an ongoing basis.

The Role of Gold in a Portfolio

Giles: So, to wrap up here, gold has been a rare bright spot so far this year. How should investors be thinking about gold’s role in a portfolio?

Benz: Right, it’s the breakout hot asset of 2025. Amy Arnott has written some great articles on this topic about how to use gold in a portfolio and how not to use it. A couple of things emerge in looking at Amy’s research. One is that gold has actually performed pretty decently on a returns basis over the past decade, or a couple of decades, but its volatility has been sky-high. So, to the extent that you use it in a portfolio, I like the idea of keeping it to a fairly small position. We tend to see this boom-bust pattern with gold, and when do investors wake up to wanting to add gold to their portfolios? Well, it’s as it’s scraping new highs. We see this pattern again and again. So, limit it in terms of position size, have a nice long holding period in mind, so Amy recommends 10 years. That seems perfectly valuable to me—perfectly legitimate to me as well.

And then the other thing I would say is dollar-cost average into it rather than putting a whole new big position to work in gold at this juncture when it is at a fairly high level. I would just ease into it by making several smaller purchases over a period of months.

Giles: Helpful to keep in mind. Christine, thanks for taking the time.

Benz: Margaret, great to see you. Thank you so much.

Giles: I’m Margaret Giles with Morningstar. Thanks for watching.

Watch 4 Mistakes to Avoid With Your Bond Portfolio Right Now for more from Christine Benz.