What is market correlation? Market correlation is defined by Investopedia as “a statistical measure that determines how assets move in relation to each other.”
In other words, the relationship and movement of assets in relation to another asset of another kind.
This article is specifically going to address how investments move in relation to the stock market.
There are correlating investments.
There are non correlating investments.
There are inversely correlating investments.
I’m going to unpack these for you so that you can understand two things.
#1: What type of investments you have.
#2: What type of investments you should have.
Let’s start with correlating investments.
A correlating investment is an investment that either IS the stock market OR an investment that moves WITH the stock market.
These are investments like stocks, mutual funds, and ETF’s.
When the market goes up, the investment goes up. When the market goes down, the investment goes down.
Here is the problem with a correlating investment. The stock market goes up and down based on 3 things.
Speculation, currency supply, and interest rate manipulation. This means the market goes up because people think it is going to go up. The market goes up because banks and the Federal Reserve flush cash flow into the economy, raising values. Or the market goes up because banks lower interest rates to artificially cheapen money to stimulate the economy.
What this means for you as an investor is that your investment is not in your control. The value of your investment is based on speculation and manipulation. Investments like this are the most risky and historically yield some of the lowest ACTUAL REALIZED returns for the average investor.
A non-correlating investment is an investment that has no relationship to the stock market in regards to the returns or values of the investment.
These are investments like life settlements, commodities, and small business equity.
A life settlement is a life insurance policy holder selling their life insurance to an investor for cash and then naming that investor as the beneficiary. When the policy holder passes away, the investor receives the death benefit. These are based on a person’s life span, not a market. Warren Buffett and Bill Gates are two of the larger life settlement investors in the market place.
Some commodities can be non-correlating. This means they are used the same in a boom as they are in a bust. You need to research the supply and demand for these commodities to determine if they have cycles that they operate in. You also need to look at the various booms and busts to determine whether those commodities budged at all during those periods.
Lastly is small business equity. Many of these private equity investments are based on the production and growth of a small business. Sales and revenue for a company are dictated first by the activity and operations of that company and secondly by the micro economics of the region. NOT the macro economics of a country’s market.
These are great for investors, because an investor can remove themselves from market volatility entirely. I recommend a portion of the portfolio of my clients go into these types of investments.
The final category is inversely correlating investments and these are investments that perform in an opposite trend to the stock market.
These are investments like The Sacred Account, Gold & Silver Bullion, and Bonds or Notes.
The Sacred Account is a high early cash value dividend paying whole life insurance policy that has not lost money in the last 150+ years in a row. These are more interest rate sensitive. The performance goes up when rates go up. The performance goes down when rates go down. If you know interest rates, you understand that when the interest rates are raised, the stock market goes down. When the interest rates are lowered, the market goes up. Because Sacred Accounts are interest rate sensitive, they have an inverse correlation to the stock market.
Bonds and notes are debt instruments. They pay an interest rate. As I mentioned early, rates work inversely to the market. So that would mean bonds and notes are the same. I like these types of investment because I can set my rate and it stays at that rate whether the stock market goes up or whether the stock market goes down. I can also work with current rate markets to set what I want to charge on my investments.
These types of investments are primarily where I tell my clients to invest. It protects them from the cons involved in correlating investments (speculation & manipulation).
If you’re reading this right now it is really important to understand what you have and what type of investment category it falls into. All investments seem “fine” until they aren’t. Prior to 2008 those who were homeowners and stock market investors thought everything was great and were making money until the market tanked. Then they lost. Don’t wait until it happens.
Invest a portion of your portfolio in correlating investments, a portion of your investments in non-correlating investments, and a portion of your investments in inversely correlating investments. This means you are ALWAYS making money.
The average person is only invested in correlating markets which means they only make money when the market is up and lose it all when the market is down.
Own Your Potential,
CEO & Founder of Wealth DynamX
Jerry Fetta helps his clients gain more financial knowledge, make more money, keep more of it, and multiply what they keep.
If you feel like one or more of these areas is costing you money and opportunity right now, then get more information about Jerry Fetta and Wealth DynamX by going to www.WealthDynamX.com/contact