Investing is almost always associated with risk. To create a strong portfolio, it’s a good idea to have a mixture of both higher and lower risk investments and ensure diversity in asset types.
High portfolio diversity is a good way to protect your investments in volatile markets, as is investing in non-correlated assets. This article will briefly explain what non-correlated assets are and why they make a sound investment decision. Let’s get started.
What Are Non-Correlated Assets?
Asset correlation is a fundamental concept that deals with how the movement of various assets corresponds with one another, and it comes in three degrees:
- Positive correlation: The assets move in the same direction simultaneously. When one asset goes up or down, the other follows suit.
- Zero correlation (non-correlated): The price movement of one asset does not affect the price of the other.
- Negative correlation: The movement of an asset is associated with the opposite movement of another, meaning that as the price of one asset increases, the price of the other will decrease.
Some investors may not account for the correlation level of their portfolio, which can negatively affect them in the long run. For example, real estate and bonds can be affected by changes in interest rates, which means that if one of them starts sinking, the other is likely to follow suit (positively correlated).
This is where non-correlated assets come into play. They are assets whose value is not directly tied to fluctuations in the traditional markets and are less likely to be affected by market volatility and economic news. Here are some examples of such assets:
- Gold and precious metals
- Real estate or REITs (real estate investments trusts)
- Emerging market bonds
- Collectibles and possessions such as art and wine
- Commodities
- Hedge funds
This list is non-exhaustive and is meant to act as an example. When investing in non-correlated assets, be sure to research the options that best fit your individual financial situation and your investment goals.
Benefits of Non-Correlated Assets
The main benefit of having non-correlated assets is that they help you reduce the risk in an investment portfolio while boosting your chances of getting higher returns long-term. For example, in the case of an unpredictable market event that tanks the value of many positively correlated investments, non-correlated assets can help maintain a good level of portfolio performance.
This is also related to the modern portfolio theory, which is based on the idea that markets are efficient if you use diversification to spread investments across different asset categories.
Final Thoughts
Having a diverse portfolio is always a good idea. It helps you protect your returns and lowers the investment risk you take on. No matter which investment theory you support, non-correlated assets can be a huge benefit when implemented as part of your investment strategy. We’ve created a special fund, Alpha Diversifed Fund that is designed to produce equity-like returns without the gut-wrenching volatility of the stock market. Want to talk to the portfolio manager, Mark Kress, and get his take on it? Let us know and we’ll arrange a one on one.
Please feel free to reach out to me on this or any of your investment needs or questions. I may not always have the answers at my fingertips, but I promise I will get them for you. Mark Kress
Founded in 2010, our services include boutique hedge funds, separately managed accounts, financial planning, estate & trust services, private placements and in-house concierge services for high net worth individuals, families, and businesses.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. All investments involve risk including the loss of principal.