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How closely two investments move together. Low correlation means they often move in opposite directions.
Why It Matters
Correlation is the secret sauce of diversification. If all your investments move together, you're not really diversified. Stocks and bonds historically have low correlation - when stocks crash, bonds often rise. Gold has near-zero correlation with stocks. Building a portfolio with low-correlated assets smooths out your returns and reduces risk.
Key Points
- Correlation ranges from -1 (perfect opposite) to +1 (move exactly together). Zero means no relationship
- US and international stocks have become more correlated over time due to globalization
- During market panics, correlations spike - everything falls together (called "correlation breakdown")
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What Is Diversification?
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Common Questions
How closely two investments move together. Low correlation means they often move in opposite directions. Correlation is the secret sauce of diversification. If all your investments move together, you're not really diversified.
Correlation is the secret sauce of diversification. If all your investments move together, you're not really diversified. Stocks and bonds historically have low correlation - when stocks crash, bonds often rise. Gold has near-zero correlation with stocks. Building a portfolio with low-correlated assets smooths out your returns and reduces risk.
Correlation ranges from -1 (perfect opposite) to +1 (move exactly together). Zero means no relationship
US and international stocks have become more correlated over time due to globalization
During market panics, correlations spike - everything falls together (called "correlation breakdown")