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OCTOBER 4, 2010
FUNDAMENTALS OF INVESTING
By JONNELLE MARTE
Many mutual-fund investors strive for diversified portfolios, but few fully grasp a concept that is
key to achieving that aim: correlation.
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Profit From Asset Correlations - WSJ.com#printMode Page 2 of 3
Another thing to be wary of: Correlation often surges in a crisis. In the 2008 crash, for instance,
many assets across all classes exhibited unusual correlation when they headed down.
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Sometimes, investors will choose assets that are negatively correlated in order to hedge risk. If
you don't want to sell your U.S.-stock funds but want to temporarily cut your stock risk, you
might invest in an inverse fund designed to perform well when a stock index does poorly.
Such strategies are only recommended in the short term because they essentially cancel out
returns. Holding too many negatively correlated assets can be a little like trying to hit the gas
while slamming on the brakes, says Jonathan Satovsky, chief executive officer of Satovsky Asset
Management LLC, a wealth-management firm in New York.
Even weaker is the connection between Treasury bills and the S&P 500, minus 0.05 over the past
decade.
Tools for individuals include assetcorrelation.com, which finds correlations between assets and
between asset classes.
Ms. Marte is a staff reporter for The Wall Street Journal in New York. She can be reached at
jonnelle.marte@wsj.com.
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