Home > Resources > Risk Management> Asset Allocation > Correlating Your Portfolio

Correlating Your Portfolio

Correlating Your Portfolio

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.? 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.?

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.



Fee based Asset Management and Securities offered through Linsco Private Ledger. Member NASD/SIPC

Only if You Are

One of The Select Few

Who Prefers to Take Charge

You will research and find the right advisor
  • Experience
  • Past Results
  • Fee Schedules
  • Investment Style
  • Professionalism
  • Credentials

You may also be interested in...

Asset Allocation ? Is your Portfolio Really Diversified

Asset Allocation ? Is your Portfolio Really Diversified

Asset allocation may be the investment equivalent of flossing your teeth, most people know they should do it, but somehow they just don't get around to it. What Exactly Is Asset Allocation? In many ways asset allocation is synonymous with diversification. But diversification is a relative... more

Asset Allocation- Easing The Burden of Diversifying

Asset Allocation- Easing The Burden of Diversifying

Knowing how to build a diversified portfolio can seem overwhelming. Two words that seem to go hand in hand when investing are risk and return. Asset allocation can be an investor's primary tool for managing overall portfolio market risk by apportioning investment funds among categories of assets... more

Correlating Your Portfolio

Correlating Your Portfolio

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... more

Diversifying All Your Assets

Diversifying All Your Assets

When asked how their assets are diversified, most people respond by indicating how much of their portfolio is divided between stocks, bonds, and cash. But looking at your overall financial diversification means more than simply looking at your investment portfolio - you need to examine all your... more

Make Rebalancing a Habit

Make Rebalancing a Habit

We all know we should rebalance our portfolios periodically to ensure they stay in line with our targeted asset allocation. Why, then, is it so difficult for us to do this? The primary reason is that rebalancing goes against our basic instincts. With rebalancing, you are generally selling those... more

Additional Risk Management Resources