by Adam Netland

You’ve commonly heard the importance of diversification within your portfolio of assets, but how can diversification be measured? An important concept we consider when managing portfolios for our clients is the degree that assets are correlated or uncorrelated.

Correlation, in portfolio management, is a statistical measure of how two securities move in relation to each other. Basically, it examines the combination of investments that “zig” when others “zag.”

Factors that drive expansion in varying industries and regions can be fairly different (uncorrelated) from year to year. While diversifying does not guarantee better performance and cannot eliminate losses, here are a few positives of having uncorrelated assets in your portfolio:

• Take advantage of different economic cycles
• Potentially reduce overall portfolio volatility
• Increase the likelihood of more consistent returns

Determining what asset classes to invest in can be a daunting task, but diversifying across less correlated assets is essential for spreading out portfolio risk.