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CORRELATION

When a mutual fund moves up or down in a similar fashion as its related index and/or to the overall market, it is said to be correlated to its index or to the market. There are degrees of correlation ranging from "1" to "-1" with "1" a perfect correlation and "-1" a perfect non-correlation (exact opposite). If a mutual fund or strategy has a correlation near "0" it is said to be non-correlated. As you can see from the chart below, during the crash from Nov 2007 Ė March 2009 all sectors of the market collapsed resulting in massive losses. It didnít matter if one was in value or growth or international or real estate or small or large company style mutual funds, they all went down in generally the same way. They were all strongly correlated to each other and the overall market.


Correlated investments are the biggest risk investors face. They are told to diversify and may hold 10 different mutual funds and/or a variety of stocks. Often times funds and stocks have strong correlations with each other and/or the general markets and subject the investor to substantial risk. To be truly diversified, one must have investments that are non correlated with each other and to the general markets.


Advisory Services and Securities offered through Centaurus Financial, Inc. a registered broker/dealer and registered investment advisor,
member FINRA and SIPC.
1186 E. Grand Ave., Arroyo Grande, CA 93420
Phone: 805-473-6679 Fax: 805-473-0751
CA Insurance License #0703952