Correlation
Definition
Correlation measures the degree to which two assets move together. It ranges from –1 to +1. A correlation of +1 means the assets move in perfect sync. A correlation of –1 means they move in exactly opposite directions. A correlation of 0 means their movements are unrelated.
Why It Matters to Investors
- Key input for portfolio diversification
- Helps assess whether assets will provide protection during downturns
- Low or negative correlation improves risk-adjusted returns
- High correlation can lead to hidden concentration risks
- Vital for understanding how different parts of a portfolio interact
The TiltFolio View
Both TiltFolio systems are built on the idea that true diversification requires low correlation between assets. TiltFolio Balanced combines bonds, stocks, and gold precisely because they behave differently under various economic conditions. TiltFolio Adaptive's trend-following system selects asset classes based not just on performance, but also on how they interact with each other.
We aim to reduce correlation during periods of stress and avoid concentrated bets that move together. TiltFolio Adaptive can rotate between uncorrelated assets, while TiltFolio Balanced maintains consistent exposure to assets with different economic sensitivities.
TiltFolio Adaptive's historical correlation with the S&P 500 is around 0.14. This low correlation is a sign that we are doing something fundamentally different from traditional equity-focused strategies.
Real-World Application
• A portfolio of only tech stocks will have high internal correlation
• Holding both equities and long-duration bonds tends to reduce correlation
• Gold often shows zero or negative correlation to equities, especially during crises
• TiltFolio's low correlation to the S&P 500 helps reduce total portfolio volatility