For many people, building wealth relies on making smart investments. Serious investors think beyond stocks and bonds to create a diversified portfolio that includes non-correlated assets. If you haven’t yet started investing in non-correlated assets or are rebalancing your portfolio, it might be time to consider branching out into new types of investments.
Asset correlation is essentially the relationship between two types of investments. If they are positively correlated, they typically move together, whether that’s gaining or losing value. If they are negatively correlated, they move in opposite directions. If they are non-correlated, their movements are totally independent of each other, and the price movement of each asset has no effect on the other. A truly diversified portfolio will include an assortment of negatively and non-correlated assets to help reduce the risk of loss if one or more assets perform poorly.
The primary aim of diversifying your portfolio with non-correlated assets is to reduce the risk of a potential loss. When one asset is not performing well, others may be able to close the gap. If one or more of your investments is particularly volatile, having non-correlated assets may help you generate more stable returns and help protect you from losses.
Balancing your portfolio with nontraditional investments that are non-correlated to the stock market is one way to mitigate risk and minimize the impact of market swings. Some asset types you might not have considered include:
Like any type of investment, it’s important to understand the potential risks and benefits before you take the plunge.
Investments outside of the publicly traded market may not be as easy to sell quickly. Some also lock up your funds for a minimum period of time. If you think you might need access to your cash within a certain period of time, bear this in mind when making investment decisions.
If you invest in a one-of-a-kind asset, such as a piece of art or an architect-designed building, it may be difficult to find comparable items to put a value on your investment. This can also impact liquidity, especially if you hold out for a specific value and need to wait for the market to shift.
Correlation between assets can change over time, so periodically assess the diversity of your portfolio.
Some non-correlated assets provide relatively stable returns, while others have the potential for wild swings. Know your comfort level with this type of volatility when choosing your investments.
Each type of investment reacts to its own set of influences, so make sure you have an understanding of the best times to buy and sell various types of assets. Some investments are tied closely to oil markets, others to interest rates, and others to broader macroeconomic trends. Know what influences and impacts your potential investment before you take the plunge.
When you make an investment, understand the sponsor’s role, their fees, and how they get paid so there are no surprises. It’s also important to know if they have “skin in the game” alongside the investor because this can have an impact on returns.
The whole premise of diversifying starts with doing a little bit of everything. Don’t put all your eggs in one basket. Start small and have a plan to build gradually over time—and stick to it!
If you’re diversifying into non-correlated assets and want to receive regular returns, mortgage fund investing is a good place to start. You invest in a fund that is managed by finance professionals who originate hard money loans to borrowers using equity as collateral. When the loans are repaid, you receive a share of the interest earned in monthly or quarterly dividends.
To learn more about generating income from mortgage funds, read How to Grow a Passive Income Portfolio in Today’s Market.