In two investment books I have read, they suggest having assets that are negatively correlated with the broad equity market to smooth out stock market volatility and maintain a higher rate of return. However, they don’t specify which assets these might be.
Ray Dalio also recommends holding 10 to 12 uncorrelated assets to reduce risk while maintaining expected returns.
While this sounds promising in theory, how can you practically determine if two assets are negatively correlated or uncorrelated? Is there a specific term or metric used in stock/ETF screeners to identify this?
What asset classes should I consider to create a portfolio with balanced correlations to lower overall risk? I’ve heard bonds, gold, commodities, real estate, international stocks, and cryptocurrencies mentioned, but how can I verify their correlation levels? Is there a standard industry metric for this that I might not be familiar with?
You should seek out gold, managed futures, short- and long-term treasuries, and possibly a modest amount of commodities. International, cryptocurrency, and real estate are largely tied to markets.
Check out managed futures, like the CTA ETF, and consider gold, such as the IAUM ETF. Also, you might want to listen to the Risk Parity Radio podcast for more insights.
Gold is the solution. Stocks performed poorly during the 1970s and 2000s, both of which are often referred to as “lost decades” for equities. Meanwhile, gold surged dramatically during those periods: from $35 to $800 per ounce in the 1970s and from $250 to $2,000 per ounce in the 2000s.
Other assets offer a false sense of security. Bonds carry more risk than people realize, real estate is heavily leveraged and often hit hard during recessions, and crypto is essentially a gamble. Bitcoin, in particular, is too new to predict how it would fare in a major downturn, but likely not well.