To achieve financial goals on time, it’s super important to protect your investments during market downfalls. This is where correlation comes into play.
Let’s compare investment correlation to your wardrobe for the perfect explanation.
Your wardrobe has to work for you in many different situations. For example, you need tee shirts, workout pants and tennis shoes when you’re ready to exercise.
On the other hand, if you’re headed to a local networking event for women, you’ll probably want nice slacks, a blouse and pumps.
Then, for cocktail parties, you’ve got the perfect black dress, open toe shoes and your best bling.
In other words, the totality of your wardrobe works for all occasions. Similarly, create a portfolio that works for all occasions for your investments.
Remembering that I don’t advise or manage money, only educate, here are some insights I’ve learned from being there and doing that…
My Investing Lessons
It’s the losses that annihilate your portfolio, as you know from the 2000’s when you saw the stock and real estate markets move in cycles based on the economy and other factors. Commodities and bonds jumped into the downfall as well. Yikes!!!
It can be a real dilemma because you also know that you have to invest your money if you want to reach those important financial goals by a certain time frame….
The concept of correlation means that you have investments that perform well while others don’t. It other words, they move in opposite directions.
This sounds pretty simple, right? But it’s a bit tricky because, unfortunately, most investments that are normally move in opposite directions (called negatively correlated in investment lingo) during upward markets will move in tandem during corrections, threatening the protection that you hoped to get from correlation in the first place.
It still makes a lot of sense to have investments that don’t tank when everything else is tanking in your portfolio. And there are some, but sometimes you have to step a little outside the box to get them.
Investments that have helped soften the blow for me are:
1. Cash, of course…but there is inflation risk, which is much less damaging over short term than market craters.
2. Income investments, especially real estate rentals. While the value the property may decline, rents keep coming in when the market is tanking. Another added punch is that during bad times, fewer people can buy a new home, so they are forced to rent providing a ready market for your rental properties.
3. Investments that short the market. This sounds complicated, but it just means that instead of owning the stock market, an investor has sold the market for the ride down.
4. Small business ownership, especially if it is in an area that benefits from a falling stock market
5. In general, stock and bond investments that pay income are safer since people plan to collect the income even if their investments are not increasing in value, but history shows that these traditional investments have not always done so well either.
Check with your financial advisor or check your portfolio to make sure that it’s covered for both rising and falling markets.
Even better, work with a money manager or financial advisor with a proven history of capturing market cycles so that you’re more heavily invested in the winners on the way up and avoiding the losers on the way down. It’s easy to check past performance so you know your money is safe.
Just like you pay attention to your wardrobe to dress well, your investments demand your attention if you want to reach your financial goals.
And just remember, this is about your life, because financial goals are life goals and life goals are financial goals.