FinancialEdge: Could Higher Correlations Wreck Your Diversification Strategy?

Don't look now, but asset correlations have been rising again. While asset correlation is normally only a subject that would interest the true finance and math nerds among us, it has a very real impact on the regular investor's portfolio. In particular, it threatens the very heart of diversification and investors who believe themselves to be insulated from bad markets by a broad portfolio may be in for a very rude surprise. (For related reading, also see Top 5 Signs Of A Credit Crisis.)


What is Correlation?
Correlation is basically a mathematical measure of the extent to which two variables "move together". If Stock A moves 5% and Stock B moves 5%, the correlation is 100% (or 1.0). If there is no apparent linkage between the move of Stock A and Stock B, the correlation may be zero, and in some cases there can be negative correlation (as one goes up, the other goes down).

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FinancialEdge: 5 Reasons Not To Fear The Stock Market

According to a recent survey released by Prudential Financial, fear and disillusionment have once again grabbed hold of many individual investors. Nearly 60% of the survey respondents said that they had "lost faith" in the stock market, while 44% said that they are unlikely to ever put more money in the stock market again. (Why have stocks historically produced higher returns than bonds? It's all a matter of risk. Check out Why Stocks Outperform Bonds.)


Those are sobering statistics, but not terribly surprising. When times are good and the markets are running hot, people feel great about the markets and throw money at stocks. When times are bad, people swear off the markets and promise "never again" - until the next big thing dominates the headlines again.

For those who don't wish to ride that pendulum between frenzy and despondency, there are several solid reasons not to fear the market.

To read the complete column, please click the link:
http://financialedge.investopedia.com/financial-edge/0611/5-Reasons-Not-To-Fear-The-Stock-Market.aspx#axzz1Q2GXzo00