Correlation shows whether two investments tend to move together, move in opposite directions, or move independently.
Think of it like co-op vs solo play. Some assets always run side by side, some counter each other’s moves, and some don’t care what the others do at all.
Correlation is key for diversification. Holding assets that move differently can reduce overall risk and smooth out portfolio swings.
If everything in your portfolio is highly correlated, losses tend to hit all at once. Understanding correlation helps build setups that can better survive different market environments.
Correlation is usually expressed as a number between -1 and +1:
- +1: assets move together almost perfectly
- 0: no meaningful relationship
- -1: assets move in opposite directions
Low or negative correlation can help balance portfolios, especially during periods of high volatility. Correlation can change over time, so it should be reviewed regularly.
A common mistake is assuming correlation is permanent. Assets that once moved differently can become correlated during market stress.
Another error is relying on labels instead of data. Different asset types don’t always guarantee diversification if their correlation rises during market cycles.
On Stoxcraft, correlation appears in portfolio insights and risk-focused analysis to help explain how assets interact.
It’s also used in the Stoxcraft Portfolio to highlight diversification effects and how combined positions may behave across different market conditions.
