One thought on “Negative Correlations”

  1. Mike Finley says:

    You want negative correlated asset classes so everything doesn’t drop all at once within your portfolio. Think of this issue as you would a seesaw from your youth. When one side is going up, the other is going down. The game works only when the two sides work in conjunction with one another.

    For example: Stocks and bonds tend to have a pretty good negative correlation. Often times (not always) when stocks are going up, bonds are going down and vise versa. This is one of the reasons why you want bonds (high quality U.S. government bonds are the ideal negative correlated asset class of bonds) and stocks in your portfolio.

    Negative correlations are not static, which is to say they change in different environments (the variation changes). This is also why we have different size companies (small vs. big) in our portfolio. Owning emerging and developed international stocks is wise as well. International bonds might help and so could stock in commercial Real Estate (REITs).

    The bottom line? It would be wonderful if your portfolio went up everyday, but that is not realistic. You want investments that keep you afloat when others are tanking for one reason or another. You want negative correlated asset classes!

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