If we asked you right now how correlated your investment portfolio is — would you know how to answer?
Would you understand the question?
And would you realize why it even matters in the first place?
Filling your portfolio with assets that are all susceptible to the same market events — think stocks, bonds, etc. — can have devastating effects if that market were to take a major downward swing.
An event that, unfortunately, has been happening with increasing frequency over the last few decades.
Investing in non-correlated assets can help investors avoid the impacts of negative swings, but many of us who are self-taught and self-managed aren’t always aware of just how correlated our assets are — or what we can do to fix that fact.
Which is why we’re here today. In this article, we’re going to take a deep dive into non-correlated assets so you have all the facts you need to improve your portfolio and the health of your wealth.
Follow along to learn:
- What correlation and non-correlation means when it comes to investment assets
- Why it’s important to think about correlation when investing
- Which assets to invest in to improve your correlation
- The all-in-one software for tracking your new, non-correlated assets
Defining Correlation as It Relates to Asset Classes
Correlation is a term used in statistics to describe how different variables move in relation to each other.
When it comes to today’s topic, asset correlation, those variables are investments which you can add to your portfolio.
There are three major “buckets” into which correlation falls:
- Positive correlation: When an event in the market makes the value of two assets move in the same direction, those assets are positively correlated with each other.
- Zero correlation: When the market position of one asset has no impact on the market position of another, you can say that those assets have zero correlation.
- Negative correlation: When the value of two different assets move in opposite directions after a market event, or when the value of one decreases as soon as the value of the other increases, there is a negative correlation.
Correlation coefficient is another statistical term that measures the degree of correlation. A correlation coefficient of 1.0 represents a completely positive correlation. And a coefficient of -1.0 shows a completely negative correlation.
Non-Correlated Assets: What Are They?
In the investment world, a non-correlated asset is one with zero correlation to the U.S. stock market.
The value of a non-correlated asset can still move in relation to a large swing in the stock market — after all, economic news and changes make a wide ripple. However, non-correlated assets are those that still don’t fluctuate enough to even get near a correlation coefficient of 1.
How to Calculate Correlation
We’re big fans of the correlation matrices that visualize coefficients. Here’s one for ETFs from Portfolio Visualizer and here’s a much prettier one provided by Guggenheim Investments.
The downside with these tools is that they may not have an entry for some of the more obscure assets you want to invest in to de-correlate your portfolio.
If you run into that issue, there are lots of actual asset correlation calculators just a Google search away.
And finally, if you really need a custom correlation calculation, there is a formula you can use. This resource provides that, as well as a link to an Excel template you can plug your numbers into to find your correlation coefficient.
Why Fill Your Portfolio With Non-Correlated Assets?
There are a few critical reasons why non-correlated assets are a must in the modern portfolio.
Protect Capital Through Diversification
A diverse portfolio is one that has a balance of asset types, asset classes, and correlation coefficients. Why? Because this is the best way to hedge against the risk of capital loss.
A portfolio that’s built just on traditional assets is likely to experience a capital loss when a drastic downturn hits the stock market. However, a portfolio that balances traditional assets with less traditional ones that aren’t correlated with the stock market won't feel that downturn or those losses nearly as harshly.
We really enjoy this explanation from Masterworks on how looking at correlation is a way to beef up diversification efforts:
“If diversifying a portfolio is an investment strategy by which you put your eggs in different baskets, correlation is a measure that helps you to discern how different your baskets are, and where to put your eggs so that you don’t lose them all in one fell swoop.”
ROI You Can Rely On
After the 2008 financial crisis, the swift but impactful COVID-19 recession, and a curiously long bull market as of late — we don’t blame any investors for being a bit nervous.
But with a portfolio that contains a healthy balance of non-correlated assets, it doesn’t matter what happens if that bull does indeed stop charging forward. You’ve built protections against poor market conditions and a portfolio that will continue to create return on investment (ROI) despite how traditional sectors are fairing.
The Main Risks Associated With Non-Correlated Assets
Naturally, there are also some catches that you should be aware of when it comes to investing in non-correlated assets.
Higher Volatility
Not all, but certainly some alternative assets that have great non-correlation also have a great deal of volatility.
Just look at investing in NFTs. With the market flooding the way it is and no one singular determiner of what these pieces of digital are worth, values can skyrocket one day and plummet the next.
Of course there’s also the entire crypto space, the value of which can be swayed by social media messages.
And then there are some really creative non-correlated investment opportunities, like equity crowdfunding, that have the same potential for high return as they do for high and sudden loss.
Lower Liquidity
Liquidity dictates how easily an asset can be sold off, ideally without taking a major loss.
Non-correlated assets that are less familiar to investors, and that also don’t have a marketplace where they’re easily sold, may be hard to sell off for a good price. This makes them less liquid.
Another thing that impacts liquidity when it comes to non-correlated assets is their uniqueness. Often, assets in this space are one-of a kind — like artwork, NFTs, and some other types we’ll explore in the next section. This means there’s less liquidity in the overall market than there is when it comes to public equities.
Popular Asset Classes That Are Non-Correlated with the Stock Market
Now backed by all the knowledge you need to understand the ins and outs of non-correlated assets, allow us to show you a few alternative assets with which you can get started!
Precious Metals, Especially Gold
Gold traditionally has less than a 0.5 correlation coefficient with the stock market. And interestingly, gold does tend to correlate more with a good market and correlate less with a poor market.
No wonder gold, and other similar precious metals, have long been seen as smart investments to hedge against the impact of market upsets!
Real Estate, or REITs
People will always need somewhere to live. That coupled with the long-term nature of leases and mortgages make the value of real estate assets less reactive to economic news than traditional assets.
Better yet, you don’t even have to purchase physical real estate to go all-in on this alternative asset class! Real estate investment trusts (REITs) have low correlation with the S&P 500 — not too far off from gold at approximately 0.6. Plus, these assets actually perform better in the face of inflation. Sounds like REITs are a valuable hedge against both inflation and loss.
Crypto, NFTs, and Other Digital Assets
At this point, every active investor has heard of cryptocurrency and NFTs. But there are also many more (like, thousands) types of digital assets — their market capitalization totals in the hundreds of billions, in fact.
Digital assets can also include mobile apps, domains, websites, SaaS platforms, DeFi assets, social media profiles, and tons more.
These types of assets create a world of possibilities for investors who want to get creative with their diversification and really explore their risk/reward boundaries.
Physical Collectibles
Modern investors don’t always think of the physical things they own as being part of their portfolio. But if they have value and you intend to grow or even transfer that value to future generations, things like artwork, antiques, homes, jewelry, vehicles, and even that baseball card collection are all assets!
Physical collectibles typically have their own niche financial markets where their value is set and where they can be bought and sold, making them non-correlated assets with value that is totally independent of the stock market.
Manage Your Stable of Non-Correlated Assets With Kubera
Time to get real about all those awesome non-correlated assets we just talked about.
You have to manage them all to ensure they’re having the impact you want within your portfolio.
You could implement a truly tiring number of alternative investment platforms to track each and every one of these assets.
Or, you could simply use Kubera.
Kubera is the only tool in today’s bloated financial marketplace that’s custom built to manage a highly diversified portfolio for the highly modern investor.
We can say that with confidence because our small, dedicated team built Kubera from the ground up to solve our own modern investment conundrums — and now, yours!
Kubera is first and foremost personal balance sheet software where DIY investors can track every single solitary asset side by side. From cars to trading cards to crypto coins, Kubera provides the best consolidated view of your assets, your debts, and your overall portfolio performance.
But it doesn’t stop there.
With Kubera, you can also calculate ROI on your investments (in the form of IRR) — automatically and in your currency of choice. With this feature, you can finally make an apples-to-apples comparison of performance across assets, including ones you may have purchased in a different Fiat currency or even cryptocurrency.
Learn more about finding the IRR on your investments inside Kubera here.
On top of individual asset performance, you can also track the performance of your entire portfolio with our charts and our recap screens. Here, we crunch all the necessary numbers to give you a digestible view of asset and portfolio performance as well as net worth change, all over various time frames.
Take a full tour of how Kubera works or jump right in and sign up for an affordable subscription!
For those of you who work with a financial advisor or wealth manager, you can still use Kubera alongside their services. Just share Kubera’s white-label solution with them today. As soon as they sign up to use our platform as part of their client portal, they’ll be able to offer more modern and holistic financial services to all of their clients — yourself included!