|Source: Capital Pixel|
Thus, bonds are a hedge or a type of insurance in the event of a significant sell-off in stocks. This shift of assets into bonds is "flight-to-quality" and typically is concentrated in Treasury notes and bonds. Again, it takes place when the market is scared.
A good way to put on this hedge is simply to use AGG or a similar Barclay's Aggregate Index exchange traded fund for the fixed income portion of assets. Note three metrics: .08% expense ratio, 5.3 duration, and 31.29% Treasury issues. The duration of 5.3 tells you that, if yields rise 1% from 2.3% to 3.3% over the next 12 months, then AGG will fall in price by approximately 5.3%. Add in 1.8% approximately from interest payments and total return would approximate -3.5%. There's no free lunch here!
Those looking for a really good "flight-to-quality" hedge might consider TLO - the long Treasury etf. Note that it has a duration of 16.6 years so is a lot more volatile than AGG. Also note that it was up over 23% in 2008!
Disclaimer: This post is for educational purposes. Investors need to do their own research or consult a professional before making investment decisions. Exchange traded funds mentioned are held by me and by my clients.