Correlation in Investments

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A good way to manage investing risk is to make sound a series of sound investments that are uncorrelated.

Uncorrelated risks move in varying degrees of opposition to each other. Two assets that are 100% correlated will move up or down in value in tandem. However assets that are 100% uncorrelated will move in opposition to each other (i.e. if asset A goes up by 20% asset B will go down by 20%).

Incorporating a strategy of uncorrelated risk makes it less likely that a severe downturn in your investments will cause a catastrophic loss.

Assets of radically different classes, such as technology stocks and gold, have been very uncorrelated. However, more recently, perhaps because of the democratization of access to information through the Internet, assets that have historically been uncorrelated have moved more in tandem.

Here is a list I made up of 10 investments that you can examine and consider for your portfolio:

  1. A profitable e-commerce website that you run yourself.
  2. Timber or lumber stocks
  3. Technology stocks (with dividends)
  4. Real estate investment trust (REIT) stocks
  5. Mortgage REITs
  6. Consumer packaged goods (CPG) stocks
  7. Energy stocks
  8. Raw land
  9. Bonds/Treasuries
  10. Gold

A list of assets by varying degrees of correlation is available here.