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Other Articles
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Asset Allocation
Correlating Your Portfolio
By Richard Dragotta
Managing Partner, Integra Investment Service, LLC
Regardless of how smoothly they operate, all
individuals, organizations, industries, and
economies routinely experience setbacks, ranging
from minor inconveniences to major catastrophes.
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
Different groups of investments may be subject to different types of risk. Negative correlation is a
portfolio strategy that is based on diversification _ and the assumption that something, somewhere, is
bound to go wrong.¹ The idea behind negative correlation is to own asset classes that may offset
risks present in other classes.
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.
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.
2) This hypothetical example is used for illustrative purposes only and does not represent any specific investment. Actual results will vary.
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