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Correlating Your Portfolio
Even the most closely managed portfolio is not immune to setbacks. In fact, they are so likely that the best defense may be to expect some losses but to employ a method to help reduce any damage. Go
Negative
A hypothetical example of negative correlation might be the relationship between airlines and rail carriers. Rail carriers may carry more passengers when airlines are facing challenges such as low passenger demand or labor strikes. Likewise, airlines may prosper when rail carriers are facing similar constraints. A hypothetical portfolio that has both airline and rail carrier holdings may be less volatile than a portfolio that owns one type but not both.² Building an efficient portfolio is a challenge, especially when you consider correlation and other factors. Please call if you would like to discuss strategies to help strengthen your portfolio. 1)
Diversification does not guarantee a profit or protect against a loss. It is a
method used to help manage investment risk. |
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Regardless
of how smoothly they operate, all individuals, organizations, industries, and
economies routinely experience setbacks, ranging from minor inconveniences to
major catastrophes.
Perfect
negative correlation would mean that when one group of investments in a
portfolio performs poorly, another group of assets performs well, offsetting
poor returns with good returns. Few asset groups are perfectly negatively
correlated, but your portfolio may still be able to benefit from the principle.