Diversification Part 2: Correlations

Yesterday I discussed the concept of diversification (what it is and what it isn’t) at a high level.

I wrote, “Diversification has very little to do with how many stocks, mutual funds and ETFs are in your portfolio. Rather, diversification is about the correlations between assets in your portfolio.”

“Correlation” may be a bit of a hazy, confusing concept for some so I’d like to provide a bit more color (literally and figuratively).

So, let’s start by taking a look at correlations between major asset classes in the matrix below. Continue reading “Diversification Part 2: Correlations”