Better still is constructing a portfolio of individual securities and asset classes that complement one another. Or, as portfolio managers like to say, assets that are “noncorrelated.” In plain English, that means portfolio’s securities and asset classes don’t always move in the same direction by the same amount, and in some cases actually move in opposite directions.
Those nonsynchronous moves can help to limit losses if conditions in one or more markets turn treacherous.
The free tools at portfoliovisualizer.com give investors an opportunity to build more sophisticated portfolios. To begin, click Asset Correlations to be taken to a page that allows you to measure the correlation between individual stocks over various periods. For example, if you want to compare the relationship between Apple (ticker: AAPL) and Alphabet (aka Google) (GOOGL), simply type in their ticker symbols, insert the start and end date (optional), and click View Correlation. Next, under Correlation Results, click on Rolling Correlations for a chart displaying how tightly the two stocks have moved.
You’ll notice that between 2005 and 2008, the correlation between Apple and Alphabet generally ranged from zero to 0.40, indicating below-average linkage. (Apple’s correlation to the Standard & Poor’s 500 index is 0.80, which is fairly typical for most stocks.) That was followed by a multiyear period of falling correlations, though the number has risen recently. The same test can be performed for any two stocks by inserting their ticker symbols at the top.
The site also allows investors to determine correlations between asset classes, as measured by the exchange-traded funds tracking broad market benchmarks. From the home page click Asset Class Correlation. You’ll have the option of changing the default start and end dates, which is set at April 2009 to the present.
To provide your portfolio with a degree of downside protection, look for low or negative correlations between asset classes. For example, the overall U.S. stock market, as measured by the Vanguard Total Stock Market ETF (VTI), has a negative correlation to long-term U.S. Treasury bonds, as measured by the iShares 20+ Year Treasury Bond ETF (TLT). This indicates a valuable diversification benefit.
A word of caution: Limiting correlations within and among asset classes isn’t an end in itself. The best long-term strategy is still to buy financially sound, well-managed companies with consistently above-average rates of growth — and then hold them until those favorable criteria no longer apply.
All things being equal, however, building a portfolio of stocks whose moves complement one another is an objective worth investigating.