Investment correlation is not one of the most talked about topics when it comes to investing, but it is certainly one of the most important.
Have you ever had everything going well for you at once, and then at the drop of a hat it turned to all bad for you at once?
This is an experience you may be familiar with if you have a high investment correlation within your portfolio.
Ed Butowsky explains more in this week’s video, but the overarching concept is important to grasp: A high investment correlation will lead to high high’s and low low’s.
This can not only be a drag on your portfolio’s returns but also on your investor mindset as well, which we know is important to keep on track during your investment journey.
Summary:
Definition: Investment correlations measure the relationship between the returns of two or more assets.
Correlation Coefficient: Ranges from -1 to 1, indicating perfect unison (1), opposite directions (-1), or no relationship (0).
Purpose: Helps investors diversify portfolios, manage risk, and optimize asset allocation by combining assets that do not move in tandem.
Thank you for reading this week’s “Making Sense with Ed Butowsky” article. To view the rest of Ed’s articles, you can click here or you can also check out Ed’s personal website to learn more about him.
For more information, email Jordan McFarland at jordan@chapwoodinvestments.com.
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