What is correlation when it comes to investing?
Different asset classes in the market sometimes move in opposite directions called negative correlation. This can protect investors. Well diversified portfolios are allocated so that their asset classes move in a NEGATIVE correlation. Because of the negative correlation portfolios that are properly allocated are not as volatile and will capture gains when markets recover. The reason is that markets that are down are being hedged by markets that are up. Volatility is not good for a portfolio because it is possible that you could lose ground and not recover from those losses. The strategy is to soften the fluctuations to the overall portfolio by negatively correlating.
It sure isn't comfortable while the markets are fluctuating but historically they will consistently move in a positive direction over a 20 year time period.
Is your portfolio negatively correlated?
There are basic asset classes that all balanced portfolios must have in order to reduce this volatility. Most of my clients are coached to know how this works so that they understand how their portfolios are performing.
If you would like to know how your portfolio is diversified and correlated we have some sophisticated software that we can plug your portfolio list into that will give us a report on your investments. Give me a call if you are interested in evaluating yours, a second opinion never hurts. My office number is 610-695-8748 or email me at roy@yourwealthadvocate.com.
