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What does negative correlation mean and how can it help my investment returns?

A negatively correlated portfolio can help to provide better diversification while reducing overall risk. And although total negative correlation may not be possible, you may be able to allocate your portfolio to reflect a greater degree of negative correlation. 

What is negative correlation?  Negative correlation is a relationship between two variables in which one variable increases as the other decreases, and visa versa.

This means that you invest your portfolio in a way that when an event happens (like the stock market going down) causing a portion of your portfolio to decrease in value, that same event can cause other types of investments in your portfolio to increase in value.

There are different areas to consider for negative correlation. For example diversification by industry, asset class, country and other factors can help to provide greater negative correlation.

Having a negatively correlated portfolio means that you may never have the best return possible since you did not have all of your money in the one asset that may have increased in value. But it also means you may have a better balanced portfolio that provides a more reasonable level of return with reduced risk.

 

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