How Analyzing Correlation Can Reveal the Real Diversity of Your Portfolio
If investor hold several different mutual funds in their portfolios they are probably pretty well diversified, correct? Not necessarily, says John Micklitsch, CFA, director of wealth management at Ancora Advisors.
“The sheer quantity of holdings in a portfolio is largely irrelevant in terms of diversification, if the funds you hold all behave the same way at the same time. A more useful diversification plan looks at your portfolio in a way that, regardless of the environment, inflationary or deflationary, bull or bear, you hold some investments that have the potential to step up and provide positive returns,” says Micklitsch. “Not only can this approach be good for your long-term investment results, but it can be good for your emotional well being,as well. With potentially less volatility, you’ll be less likely to sell out at market lows and therefore be more likely to reach your long-term goals.”
Smart Business spoke with Micklitsch about correlation and how to build potentially more diversified portfolios.
What is correlation?
Why is correlation important to investors?
How can investors assess the correlation in their portfolios?
Is this approach to analyzing portfolio diversification unique?
How can investors begin to build lower correlation portfolios?
What are the negatives of correlation based diversififcation?
How often do investors need to revisit their allocation?
John Micklitsch, CFA, is the director of wealth management, as well as an Investment advisor representative of Ancora Advisors LLC (an SEC Registered Investment Advisor). Reach him at (216) 593-5074 or firstname.lastname@example.org.