Correlation

11/12/2021 07:30 AM By Matt Ratliff

Let's Talk Strategies


 Investing Basics - Correlation


Correlation is a statistical measure of the degree to which two variables (think stock/investments here) move in tandem with one other.


Positively correlated investments will move together. When one goes up, the other is likely going up as well.


Negatively correlated investments will move in opposite directions. When one goes higher, the other will go lower.


No correlation would mean that there is no relationship between the two investments over time.  Their value and behavior are completely independent. 


One of the keys to building a portfolio with smooth return streams is to invest in many investments that show no or little correlation with one another. Some negative correlation is OK too. The combination of unrelated investments will result in a less volatile portfolio and help you avoid sizable drawdowns (losses) taking place at the same time.


Be honest... do you know how correlated your investments are to one another?


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