Balancing effect of stocks and bonds can help your portfolio

— -- Q: When stocks drop, does the value of bonds increase and vice versa?

A: Bonds issued by the U.S. government and stocks have a teeter-totter relationship: When one goes up, the other tends to go down. But think of this teeter-totter being made out of rubber, not wood or steel, because how much they move opposite each other varies widely.

Statistics prove that stocks and Treasuries march to the beat of different trends. Over the past 120 days, the Vanguard Standard & Poor's 500 ETF voo and the Vanguard Bond ETF bnd have had a negative correlation with each other of -0.42. The Vanguard Bond ETF holds many types of bonds, but is primarily made up of Treasuries.

What does it mean that the bond ETF and the stock ETF have a correlation of -0.42? Assets can have correlations that range from -1, which means they move like mirror images, to +1, which means they move in lock step. So, a correlation of -0.42 indicates that indeed Treasuries tend to zig when stocks zag.

It's not just statistical mumbo jumbo, either. Treasuries and stocks compete with each other for investors' money. When investors are feeling bullish about the economy and corporate earnings, greed kicks in, and they shift money into stocks. And when they're nervous about the economic future, they seek the relative safety of Treasuries.

There are days when stocks and Treasuries move in the same direction. It's not common, but it can happen. And that's why it's useful to think of the teeter-totter stocks and bonds are on as being flexible.

It's also important to note that not all debt securities behave like Treasuries. In other words, not all bonds are alike when it comes to trading. Debt issued by companies with the lowest credit ratings, called junk bonds, trade much more like stocks. The prices of junk bonds will often fall along with the prices of stocks.

But the fact that stocks and Treasuries tend to move in opposite directions is why those two asset classes make up most investors' portfolios. A good helping of both stocks and bonds provides a bit of safety and security in good times and bad.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz