Chapter 1: Advanced Investment Principles
What is asset correlation
Asset correlation is the concept where certain assets tend to move in the same direction.
This can occur between both individual stocks and entire sectors.
How does it work
An example of asset correlation would be CRWD (CrowdStrike) and PANW (Palo Alto Networks), as both are cybersecurity companies competing in the same market.
Owning both would likely increase your portfolio's risk without providing additional diversification benefits, as their stock prices are likely to move in tandem.
How do you use it to your advantage
If you understand asset correlation, you can structure your portfolio accordingly. By buying non-correlating assets, you can lower risk while still maintaining good exposure to different stocks, sectors, and markets.
However, some correlation is unavoidable. For example, at Wealthy Workers, we prefer to invest only in the US market. This means that if a problem occurs in the US, many of our stocks will likely be affected.