The Power of Non-Correlating Assets
With so much uncertainty in the markets, having a well-diversified investment portfolio is especially important.
The future of the stock market is uncertain.
The night Donald Trump was elected president, Dow Jones industrial average futures dropped nearly 1,000 points. Now, the stock market is stretching into record-breaking territory. The wild swings we experienced in the final quarter of 2016 are not that normal, and the last eight years have been a roller coaster of volatility.
Are you constantly monitoring your portfolio and wondering how the next series of rate hikes, global conflicts or political decisions are going to affect your investments?
There are methods you can take to ensure your portfolio is not at risk of being affected by volatility. It is called non-correlated asset diversification. It’s not a sexy term; you probably won’t find #NonCorrelatedAssests or #Decorrelation trending on Twitter. But utilizing this technique can reduce your risk and cause less stress during turbulent stock market times.
It can also provide you with a steady stream of income regardless of the market’s actions.
What if the stock market tumbled to just half its value? What would your portfolio look like? How would you react? As much as we think we would not buy high and sell low, natural human behavior often leads us to cut our losses and sell rather than stay on for the ride. In volatile times, emotions, not logic, dictate our actions.
By identifying unique investment strategies that have non-traditional risk profiles and investing in assets that act differently from stocks, you will spread your risk and therefore have the opportunity grow your portfolio while experiencing fewer bumps along the way.
Most people do not realize how correlated their portfolio is, and so when stocks, bonds and other market assets fall, it all can crumble.
A non-correlated asset is not impacted by these swings and gives you the opportunity to experience a more successful revenue stream because your overall risk is more diversified. The outcome of your non-correlated assets is independent of traditional market outcomes.
Opportunities to invest in such non-correlated risks are available in areas such as life insurance, catastrophe insurance and even litigation finance.
Long-term, more consistent gains, even when certain aspects of the portfolio are performing negatively, are achievable with a well-diversified portfolio because the risk is spread out.
Regardless of your overall financial goals, de-correlation is about being prepared and having contingencies. And if you are nearing retirement age, your goal is likely more focused on the preservation of your assets than consumption. Stocks and bonds are subject to dramatic changes so complementing your investment strategy with non-correlated assets will help reduce your portfolio’s volatility while securing a steadier revenue stream.
Oftentimes, portfolios are constructed in a general way and, although it may not appear to be, the assets within the portfolio are actually heavily correlated in a world that is already becoming more correlated.
How can you determine how correlated your portfolio is?
Your financial adviser should have access to the many risk assessment tools available to help figure out how de-correlated your portfolio is. An experienced financial adviser will also be able to identify truly de-correlated assets and frequently monitor your portfolio to find the right balance based on your needs and financial goals.
Now is the time to make sure you are diversified appropriately.
A founding partner of Telemus, Gary Ran serves as the firm’s chairman. In this role, he is responsible for the overall strategic direction of Telemus in addition to managing key member relationships and serving on the firm’s investment committee.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. This commentary is a matter of opinion and is for informational purposes only. It is not intended as investment advice and does not address or account for individual investor circumstances. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. The statements contained herein are based solely upon the opinions of Telemus Capital, LLC. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Information was obtained from third party sources, which we believe to be reliable, but not guaranteed.
About the Author
A founding Partner of Telemus, Gary Ran serves as the firm's chairman. In this role, he is responsible for the overall strategic direction of Telemus in addition to managing key member relationships and serving on the firm's investment committee. Prior to forming Telemus in 2005, Ran served as a first vice president of investments at Merrill Lynch and as senior vice president of investments at UBS Financial Services. During his career of more than 20 years as a retail stockbroker, he built one of the largest brokerage practices in the industry. He has been repeatedly selected as one of "America's Top 100 Advisors" and "America's Top Independent Advisors" by Barron's magazine and is frequently quoted in numerous industry publications.