Not Samesies
For most of you reading this article, you likely have a portfolio with a mix of bonds and stocks. This is a common portfolio built intentionally to protect your investments in downturns. This type of portfolio has historically provided the protection we all look for because the bonds and stocks(equities) have had low correlation.
Correlation, defined by my niece, is simply ‘samesies.’
Well, her response is more appropriately related to her agreement with what was being said than any investment definitions; however, I believe it is an appropriate semi-definition in this case.
Samesies, or correlation, is more technically defined as how close two entities or assets are related and the strength of their relationship. I have written about this in the past; if you’d like to read more in detail, take a quick read of “Investing Metrics, Key Risk Metrics”.
So, Summit, are you telling me I want to have “no-samesies” in my portfolio? In short, yes. The fewer assets in a portfolio are correlated, the higher the diversification. However, the complexity and interconnectedness of our global economy have increased correlations between multiple assets and asset classes.
To internet or not, is that even a question?
Take the internet as an example. Going without the internet isn’t really an option nowadays. Our wrists, hands (phones/rings), glasses, cars, stoves/dryers, coffee makers, and everything else around us can connect in some way to the internet. We’re all so ‘connected’ that being disconnected can create anxiety.
This same type of connectivity has been seen with countries and investments across the globe. Globalization and the interconnectedness amongst markets, manufacturers, and governments have led to increased “samesies” among most countries. In many ways, dependencies. We can see the effects and impact of a natural disaster in one market ripple through to multiple markets around the globe. In most cases, the further the rippling effect, the less the impact, and of course, the fewer “samesies” (ok, fine, correlation), the less the effect.
This is quite evident when war is in the picture. Many countries that depended on wheat exports from the nations felt the impact of the Russia-Ukraine war. Before the war, it was estimated that 29% of all wheat exports came from Russia and Ukraine; since the start of the war, this has only been 14.3% (consilium.europa.eu). Or the ongoing conflict and escalation of Israel-Palestine has also led to many rippling effects across the world. To learn more about the global impact of these geopolitical events, read this article from John-Mark Young titled “Israel War & My Portfolio: Pray, Give, & Stay Disciplined.”
How do I protect myself from correlation risk?
This is where our number gets called. You hi-five one of our Financial Advisors and tag them in to take the ball. Our team of teachers will work with you so your portfolio diversification is set up to align with your goals. “Samsies” risk is minimized by diversifying portfolios with multiple asset classes, even more than just bonds and stocks. Correlation between assets is expected due to global interconnectedness. However, our team can introduce you to new asset classes you may not have considered. To learn more about asset classes, here’s an article that should set the foundation for your next discussion with your advisor – “Asset Classes: Understanding your Investments”. As always, if you have any questions or would like to dig deeper into your portfolio, take a moment and reach out to one of our advisors. Our team is always ready to help.