January 13, 2015
Why is it important to have negative correlated assets in a portfolio? Example?
Why is it important to have negative correlated assets in a portfolio? Example?
That way if one investment does bad the other will do good and they will cancel each other out. One example would be if you have stocks and bonds and when your stocks go down your bonds should go up.
It is important to have negatively correlated assets so your portfolio is less volitile at any given time. If you hold riskier assets that have a negative correlation you will get a better return on your portfolio by having the better returning parts but your portfolio will be less risky as a whole due to their negative correlation. REITS are a great negatively correlated asset to stocks, they normally move in the opposite direction as stocks if there is a big swing one way or the other. Bonds are also negatively correlated to stocks and should be held to make your portfolio better as a whole. This is what you call synergy. When the whole is greater then the parts.
Well said, gentlemen. Let’s review.
(1) Negative correlated assets keep us afloat when part of our portfolio is going down.
(2) Stocks tend to run counter to bonds. U.S. stocks tend to run counter to international stocks. Small stocks tend to run counter to large stocks. Short-term bonds can run counter to intermediate term bonds. Real estate tends to run counter to stocks as well in many cases.
(3) The negative correlations are sometimes very big and other times not big at all. Don’t get too worked up about that. Correlations are always changing. They are not stagnate and it is important to remember that.
(4) The key is to identify the different asset classes that run counter to each other and then include them in your portfolio.
(5) The most efficient way to do this is with no-load index mutual funds that keep your costs low, low, and low. In turn, your returns go up, up and up!