In the volatile world of finance and investment, diversification is often hailed as the only “free lunch.” However, true diversification hinges on finding assets that do not move in lockstep with the broader market—specifically, assets that exhibit low correlation with the business cycle. When economic growth falters, risk assets like stocks typically decline, causing portfolio values to plummet across the board. Assets with low cyclical correlation act as an unwavering anchor, providing stability and capital preservation precisely when it is needed most.
Understanding and strategically allocating capital to these low-correlation investments is a hallmark of sophisticated portfolio management. This article delves into the concept of low correlation, explores the asset classes that embody this characteristic, and explains why they are indispensable for achieving robust, long-term financial resilience.
Defining the Business Cycle and Correlation
The business cycle refers to the natural, recurring fluctuations in economic activity—periods of expansion (growth) followed … Read more