Understanding Asset Correlation

Asset correlation plays a crucial role in portfolio diversification, with low correlation between assets reducing the risk of simultaneous declines in value. For instance, while U.S. stocks and junk bonds typically share a high correlation, U.S. stocks tend to show a low correlation with U.S. treasuries during downturns. This dynamic allows investors to construct portfolios with a variety of assets that behave differently under various market conditions, enhancing stability. In recent years, categories like commodities have demonstrated a negative correlation with equities, underscoring the importance of including diverse asset types in investment strategies.