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There’s correlation and then there’s correlation

Well, it is Saturday night and another exciting evening reading my Journal of Financial Planning.  This month there is an article about the correlations between different asset classes, an important topic in portfolio management. The article is talking about how it is important not just to look at the average correlation but look at how consistent the correlation is.  As we have noted, diversification works nicely on the way up but somehow everything goes down during crisis mode – which is kinda when you want it to work.

Basically, global bonds and cash are really uncorrelated with everything else.  Natural resources do fairly well and long-short strategies work okay, except against value stocks.  (Could that be because long-short is almost always long the value stocks and short the growth ones?) Everything else is not really very reliable as diversifiers.