Correlation Awareness

The key to diversification is correlation — how assets move relative to each other. A correlation of +1 means they move identically. A correlation of -1 means they move in opposite directions. Zero means no relationship.

Ideal portfolio construction combines assets with low or negative correlations.

US stocks and bonds: typically -0.2 to +0.3 (low correlation, sometimes negative). US and international stocks: +0.7 to +0.9 (high correlation — less diversification benefit than you'd think). Stocks and gold: roughly 0.0 (virtually uncorrelated). Real estate (REITs) and stocks: +0.5 to +0.7. The truly diversified portfolio isn't just different names — it's different behaviors.