Portfolio a alokace
Asset Correlation: Why Not to Put Everything in One Basket
Key takeaways
- A correlation of +1 means assets move identically — the diversification benefit is zero.
- A correlation of −1 means perfect counter-movement — ideal, but rare in practice.
- Equities and bonds typically have low or negative correlation, which is why they are combined in portfolios.
- Correlation changes over time — in crises, assets tend to be more correlated than expected.
- Gold and real estate serve as diversifiers precisely because of their distinct correlation with equities.
Asset correlation is a statistical measure of how much the prices of two investments move together. It ranges from −1 (perfect counter-movement) through 0 (no relationship) to +1 (perfect synchrony). The lower the correlation, the greater the diversification benefit when combining assets.
Why Correlation Matters
If you had ten ETFs all with a correlation of +1 — moving in exactly the same direction — you effectively have just one fund split across ten accounts. Risk has not been reduced. Only by combining assets with lower mutual correlation do you get what Harry Markowitz called "the only free lunch in finance": reduced risk without a necessary reduction in return.
Equities and Bonds
Historically, equities and government bonds have had a low or negative correlation — when equities fall, investors shift capital to safe havens and bonds remain stable or rise. This is why combining them is the foundation of most portfolios, from the Bogleheads three-fund portfolio to the All-Weather portfolio.
Gold, REITs, and Alternatives
Gold has historically had low correlation with both equities and bonds, which is why investors add it as an insurance element. Real estate REIT ETFs and commodities play a similar role. But beware — during acute crises, correlations tend to be higher than historical data suggests. Investors in panic sell everything.
How to Use Correlation in Practice
You don't need to calculate correlation manually. Simply follow these principles:
- Different geographic regions have lower correlation with each other than different stocks in the same country
- Different asset classes — equities, bonds, gold — are less correlated than different sector ETFs
- Thematic or sector ETFs tend to be highly correlated with the broad equity index
FAQ
What is asset correlation in simple terms?
A measure of how much two investments move together. Correlation of +1 means they always go the same way, −1 always opposite, 0 means no relationship. For diversification, you are looking for assets with a low or negative number.
Why are equities and bonds combined?
Because historically they have a low or negative correlation: when equities fall, bonds typically hold steady or rise. This combination reduces overall portfolio volatility without necessarily reducing returns.
Does correlation change over time?
Yes, significantly. In crises, assets tend to be more correlated than historical data shows — investors sell everything at once. That is why it's good not to rely on correlation as a fixed protection.