One of the things that can help make your investment portfolio more resilient and able to weather shifts in market or sector activity, is making sure that it includes a large non-correlated investment or asset component. If this sounds like a highly-technical term, you may be surprised to learn that the principle of investment correlation is relatively simple. We’re going to dive into what exactly that means, and how you can utilize it in your portfolio.
What Is A Non-Correlated Investment Or Asset?
A non-correlated investment or asset is one that isn’t bound to other, often more significant, swings in market valuations. While you will undoubtedly see a change in value coincident with much larger and more broad market movements, having an array of investments that are non-correlated can help insulate you from larger losses. With the right level of diversification, you may even be able to completely offset your losses with gains from non-correlated investments.
What Are Examples Of Non-Correlated Investment Or Assets?
There are a few ways to decouple your investment values from one another. Here are some of the most popular classes of non-correlated assets.
Stocks From Differing Sectors
One of the most popular ways to ensure that your portfolio has a degree of non-correlation is to invest in stocks from companies that are in different sectors. Examples of this would be offsetting heavy investment in the tech sector with investments in the hospitality sector. Poor diversification would be heavily investing in healthcare, while also investing heavily in biotech since the two are closely tied.
Stocks vs. Bonds
To decouple your investments even further, you should be sure to invest in assets that aren’t traded on the stock market. This can be best accomplished by offsetting a very stock-heavy portfolio with a significant investment in bonds, which are debt-based security and are not tied to any particular company’s valuation. This can also help guard against market volatility since bonds will be completely unaffected by stock prices, as they represent investing in the debt of a large bank or even a country.
Marketable Securities vs. Real Estate
Marketable securities often not only have a much higher level of liquidity than real estate, but they are also two separate markets that are nearly completely decoupled from each other. Real estate markets tend to have value and trends that can completely oppose the stock and securities markets.
Why Is It Important That Some Investments And Assets Be Non-Correlated?
The biggest reason that it is important to have a variety of non-correlated investments and assets is to ensure that when any particular market takes a downturn or undergoes a correction, your entire portfolio doesn’t suffer the effects. When it comes to your investment portfolio, not keeping all of your eggs in one basket is the key to longevity and resilience.
Even Your Correlated Investments & Assets Should Have Diversification
This is important to remember, because small-cap or even micro-cap companies will be affected differently than large-cap companies, and in times of economic correction, not having sufficient diversity among your correlated investments can cause an entire portion of your portfolio to lose significant value.
Non-Correlated Investment or Asset: If You Need Help Diversifying Your Portfolio With Non-Correlated Assets
Planning your investment portfolio to be robust enough to withstand market swings while still providing a reasonable rate of return can be incredibly challenging for both new investors as well as those with established investments. If you would like to insulate your investments as much as possible from losses associated with market correlation, talk to an advisor at Prevail today. We can help you integrate non-correlated investments or assets that fit with your wealth management plan and risk tolerance.