Correlation is a factor in investing that is very important but almost never discussed or considered when making an investment. Investment correlation is the extent to which two things move in relation to each other. In other words, if one investment moves up, what will a different one do when that happens? Correlation is represented between the numbers -1 and +1. An investment that has a correlation of +1 is said to be perfectly correlated. That means that whatever one investment does, the other one will do the same thing. By contrast, -1 means that whatever an investment does, the other one will do the exact opposite. In the middle is a correlation of 0, which means they simply have no effect on each other.
T. Eric Reich, CIMA, CFP, CLU, ChFC is president and founder of Reich Asset Management and can be reached at 609-486-5073 or eric@reichassetmanagement.com.
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