Portfolio Noncorrelation
When I see a line of climbers standing single file by the hundreds on upper Mt. Everest, I wonder how many would survive a sudden deadly storm. The question then emerges as to how the wonderful solitude and serenity found in navigating God’s remote winter mountain wilderness was lost on so many mountaineers! Concentrated human activity and thinking can also be counterproductive in the financial markets, as the contrarian, Mr. Market, is now demonstrating. What is portfolio noncorrelation, how might an investor prudently apply it, and what might the penalty be for those who don’t as Trump’s tariff policy ushers in a reversion to the mean?
The Context
The bull market which ran from 2022 to the present has been dominated by an extraordinary concentration of returns to a small handful of companies. Howard Marks noted in a recent Memo that, “at the end of November U.S. stocks represented over 70% of the MSCI World Index, the highest percentage since 1970, and the top seven U.S. stocks (‘Mag 7’) were worth a heightened amount relative to the rest of U.S. stocks”.¹
The Disruption
While the last 30 months provided a wonderful ride for investors heavily invested in the ‘Mag 7’, Trump’s Trade Spat has been especially punishing these stocks, and the funds heavily weighted in them. Significant technical damage has occurred, and at a level seldom quickly reversed.
Noncorrelation
Noncorrelation is defined in the modern Merriam-Webster Dictionary as “two samples lacking indication as to the relationship between them”.² Let’s define the noncorrelation of portfolio holdings, then, as a lack of semblance in price action in a particular set of market conditions. This is the intent and purpose of portfolio diversification, to even out price swings in difficult markets, and to minimize solvency risk.
Noncorrelated Investment Options
A broad basket of stocks or stock funds can provide a level of noncorrelation among equities, to include businesses of different size, in unrelated industries, and on separate continents. An understanding of how each type of stock generally behaves in various market conditions is advisable.
As compared to stocks, bonds offer enhanced income stability, less price volatility, preservation of principle at maturity (providing the issuer doesn’t default), and priority of payment in bankruptcy. Following a few years of miserable relative performance, the environment for bonds seems to be generally favorable today.
Cash seems boring and unproductive in a raging bull market, but over the last 50 days has held up far better than most investment options. Wall Street made famous the phrase, “Cash is King in a bear market”, for good reason. Make sure your cash is earning the going rate of interest.
Alternatives are investments outside Wall Street’s favored asset classes of stocks, bonds, and cash. The general categories include Real Assets, Private Markets, Hedge Funds, Collectibles, and Structured Products. While it is usually advised that a small portion of an investor’s portfolio be allocated to alternatives, it’s notable the benefits in both return and risk mitigation can outweigh the allocation. Disadvantages can include complexity, illiquidity, higher fees, and accreditation requirements.
Pursuing noncorrelation in one’s investment portfolio today may exceed in wisdom buying the dip on the ‘Mag 7’. When venturing into new investment terrain, do your due diligence and stick with investments you understand.
Think about it, Shaun.
“The investor who loses the least in a bear market wins” ~Anonymous
“A wise man sees trouble coming and hides himself, but the simple go on and suffer for it.” ~Proverbs 22:3
“Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.” ~Ecclesiastes 11:2
1 Oaktree Capital Management, Howard Marks’ Memo, “On Bubble Watch”, January, 2025 2 Merriam-Webster online dictionary, “Noncorrelation”, April 10, 2025
The opinions voiced in this material are general and are not intended to provide specific recommendations. The economic forecasts set forth in this commentary may not develop as predicted. Diversification of portfolio holdings does not necessarily protect against loss or guarantee returns.
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