The Power of Non Correlated Portfolios
Diversification is a strategy that was designed to manage overall risk. This makes you less dependent on a SINGLE asset class for overall performance. This strategy helps increase the value of your assets over longer periods of time and is the key to any successful portfolio.
Assets are divided into "classes." Each class will have its advantages and disadvantages, but when blended together, the advantages of each outweigh the disadvantages.
Two assets that respond in the same way to economic changes are said to be "Correlated."
Two assets that respond differently to economic changes are said to be "Non-Correlated." Spreading your assets over "Non-Correlated" classes is the key to increasing performance and lowering risk!
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Example 1 | |
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Steve invests the same $50,000 but only puts 70% of his funds into the same five stocks as Kevin. The other 30% is placed into an asset class that is non-correlated to the stock market. By diversifying his assets and protecting his portfolio from risk, Steve doubles his money. Kevin invests $50,000 into five of the top stocks of that time: GE, Johnson & Johnson, Merck, Citigroup, and AT&T. Even accounting for dividends paid and stock splits, after nine years this portfolio has barely grown. | |
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Steve's Non-Correlated portfolio contains 70% assets from one asset class and 30% assets from another asset class. |
Kevin's Correlated Portfolio contains 100% assets from the same asset class. |
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Example 2 | |
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Kate is the most diversified among non-correlated assets. Kate's portfolio has $35,000 (70%) invested in the same five stocks as Kevin. She has the remaining $15,000 (30%) invested in two different asset types that are non-correlated to the stock market. Details on the specifics of Kate's portfolio are available in the member's section. Steve has $35,000 (70%) invested in the same five stocks as Kevin, and invests $15,000 (30%) into a single non-correlated asset type. This portfolio performs much better than Kevin's. Details on the specifics of Steve's portfolio are available in the member's section. Kevin has $50,000 invested equally into five of the top stocks in the market: GE, Johnson & Johnson, Merck, Citigroup, and AT&T. After three and a half years, Kevin's portfolio has lost value. The values of these stocks are taken from Yahoo! Finance and take the value of stock splits and dividends into account. | |
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Example 3 | |
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Kate is the most diversified among non-correlated assets. Kate has $35,000 (70%) invested in the same five stocks as Kevin. She has the remaining $15,000 (30%) invested in two different asset types that are non-correlated to the stock market. Details on the specifics of Kate's portfolio are available in the member's section. Steve has $35,000 (70%) invested in the same five stocks as Kevin, and invests $15,000 (30%) into a non-correlated asset type. This portfolio does not do as well during the stock market bubble. However, this portfolio comes out slightly ahead of portfolio 1 after ten years of good economic times and five years of bad economic times are averaged out. Details on the specifics of Steve's portfolio are available on request. Kevin has $50,000 invested equally into five of the top stocks in the market: GE, Johnson & Johnson, Merck, Citigroup, and AT&T. The values of these stocks are taken from Yahoo! Finance and take the value of stock splits and dividends into account. | |
Correlated Assets
If the majority of your portfolio comes from these sources, your portfolio is not adequately protected from the risk types we discussed on the previous page. All the following asset types have their performance affected by the value of the dollar, the interest rates set by the FED, and the health of the overall economy. These assets are correlated:
*Annuities
*Bonds
*CDs
*IRAs (when invested in correlated asset types)
*Peer-to-peer lending
*Real Estate
*Stocks
A Cycle of Crashes
The U.S. economy has regularly been seeing a crash every 6-7 years. It is time for the next crash, but the problem is, the economy hasn't recovered yet from the last crash. The Fed still has interest rates near zero in an attempt to help the economy recover. During the 2008 housing crash, the average American family lost 40% of its wealth. Is your portfolio ready for a crash?
