All Your Investments Went UP? There maybe something wrong with your plan!
Believe it or not, you may not want all of your investments to go up at the same time. That may seem silly; but designing portfolios so that some investments don’t make the same movements at the same time is actually a risk management tool!
When investments move together – in the same direction at the same time – they are considered to be `correlated’. Most investors have never had their investments, whether individual securities or mutual funds, analyzed as a portfolio for their correlation. That’s because most individual investors think in terms of `investments’, not portfolio strategy.
Think of it this way. Your investment portfolio is a vehicle – just like your car – which you hope will take you to your destination. A car’s engine has pistons that provide the power. Let’s say each piston represents a segment of your investments, divided evenly.
Suppose all the pistons went up and down – moving together at the same time in the same direction. That means at any given moment everything is up – or everything is down. My guess is that would produce a pretty bumpy ride and you could never be confident where your pistons – investments – would be when the car shut down.
Now suppose the pistons move up and down like they’re actually designed. One is always up when one is down, and the remaining pistons have varying degrees of correlation with all the others. That’s a smoother ride – and, you’ll likely have a greater sense of confidence in greater overall stability of value no matter when the car shuts down.
Does your portfolio contain non-correlating assets? Are your investments and managers selected in a way designed to help reduce correlation where possible?
If all your investments went up together – or down together – it could be a `red flag’ that you don’t have a real `portfolio’ at all, but just a collection of stuff you’ve been accumulating because they looked good at the time.
You’ll not be surprised when you hear me say. `It all begins with a plan.’
Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization. Learn more on the IFG Investment Blog.