March 30, 2015
What is a negative correlated asset and why do you want to collect them in your portfolio?
What is a negative correlated asset and why do you want to collect them in your portfolio?
A negative correlation occurs when two of your assets move in opposite directions of each other. For example, stocks and bonds tend to be negatively correlated, meaning that when stocks are having a higher return, bonds are having a lower one. This is something that you want in your portfolio because it will help to balance out your returns. If one section of your portfolio is doing poorly, the parts of it that are negatively correlated to that section should be doing well.
A negatively correlated asset is something that goes up when other assets are going down. Bonds and REITs are the main negatively correlated assets that most people hold to balance out their portfolio. If you hold these assets your portfolio will not have the large drops it would have if you only owned stocks. The negatively correlated assets can be more risky and have better returns, but when you hold it in a portfolio you can make your portfolio less risky as a whole and still get the better returns. This is called modern portfolio theory.
You covered the information beautifully you two. Let’s recap.
(1) You want negative correlated assets in your portfolio to soften the blow when other asset classes are tanking (stocks for instance). Think of a see saw. When one side goes down, the other goes up.
(2) By pulling in negative correlated assets into your portfolio you will ultimately reduce the risk of your portfolio and quite possibly increase your returns over time.
(3) Here are a few negative correlated investments: stocks vs. bonds, large cap stocks vs. small cap stocks, U.S. stocks vs. International stocks, and REITs vs. large cap stocks. Educate and ACT!