Asset class correlation refers to the relationship between the returns of different asset classes. A positive correlation means that the returns of two asset classes move in the same direction, while a negative correlation means that the returns of two asset classes move in opposite directions.
In general, a good combination of asset classes to achieve good results is to have a mix of assets with low or negative correlation. This helps to reduce overall portfolio risk by reducing the impact of individual security risks on the overall portfolio.
For example, a portfolio consisting of stocks and bonds may have a low or negative correlation, as stocks tend to perform well in a growing economy while bonds tend to perform well in a slowing or contracting economy. This means that if one asset class experiences a downturn, the other asset class may be less affected, providing some degree of diversification benefits.
Another example of a good combination of asset classes is to include both domestic and international stocks in a portfolio. Domestic and international stocks may have a low correlation, as stock market performance can be influenced by different factors such as economic growth, interest rates, and geopolitical events.
It's worth noting that asset class correlations can change over time, so it's important to regularly review and adjust your portfolio to ensure that it remains well-diversified. Additionally, while diversifying across different asset classes can help to reduce risk, it does not guarantee a profit or protect against loss. As with any investment strategy, it's important to seek professional advice and consider your personal investment goals and risk tolerance before making any investment decisions.
