Expect the Unexpected
Apparently, for me and my wife, this week is the unexpected car-repairs week. As I write part of this blog, I am sitting in a service area waiting for my car, while my wife’s car is also in the shop. I guess it is sometimes true that when it rains, it pours. I think the positive in all of this is that we are taking both vehicles on fairly long road trips this weekend, so if any of these issues occurred while we were out of town, things would have been far more inconvenient (and potentially dangerous).
In the case of our super-cool (that is sarcasm!) minivan, we are fortunately still under warranty. We are not so fortunate with my car, and repairs are often not cheap nor expected. As you are likely already aware, there are no warranties on your investment portfolio and there are few if any guarantees against principal loss. One of the many rules that govern our industry pretty much prohibit us from even using the word “guarantee” when speaking about investments.
So, how do you protect your money in times of turmoil or market downturns? The answer is that you should try to own non-correlated assets. Both Sarah and I try to avoid using fancy investment terms in these posts, because we feel like our industry can seem purposely confusing sometimes. However, in this case, non-correlated means types of investments that act differently from one another. If one type of investment goes down in a particular market environment, then you should try to own another type of investment that goes up (or at least stays stable) in that same environment. Owning assets that are highly correlated (meaning they act the same) could mean that you are exposed to more risk than is appropriate for your situation. *
The chart from AllianceBernstein below is a good illustration of what I mean. The timeframe is a little dated, but I think it still makes the point. A correlation of 1.0 means that the two assets move in perfect tandem with one another.
Generally, we still believe that owning stocks is a very good investment for the long term. However, owning different types of stocks, as well as other assets like real estate and bonds, can actually reduce portfolio risk and increase returns over time. So, take a look at your portfolio mix across all of your accounts, and make sure you don’t own too many assets that behave similarly. It should help you avoid unexpected pitfalls when market downturns occur.
*It’s important to note that you look at all of your investment accounts when weighing correlation. For example, what you own in your 401(k) at work may be highly correlated to the investments in your IRA.