Correlation and the Benefits of Diversification

Correlation is generally defined in the investment world as a statistic that measures the degree to which assets change in value relative to one another. However, diversification is a methodology practiced to reduce risk within a portfolio by combining assets (or investments) that have low correlations amongst themselves, thereby providing higher expected risk adjusted returns. For the past forty years the Investment Committee at JNBA has focused not only on providing sound investment returns for our clients, but more importantly, managing around the risk tolerance/capacity of our clients by keenly watching correlations and managing diversification.

2018 has been a fine illustration of why our investment approach at JNBA has been successful and is a testament to our client retention rate of 97% since we began tracking in 2001. Year-to-date, performance of U.S. small cap growth is in the double digits while U.S. small cap value is in the red. Emerging and international equity markets had an incredible run in 2017 (EM up almost 40%) but have since been a negative influence on many portfolios quarter-to-date thanks in part to a strengthening U.S. Dollar (USD) (see chart above).

So while pockets of the markets have seen incredible volatility and divergence of returns, well constructed portfolios have generally experienced modest changes in performance on a weekly basis thus far in 2018. It is important to keep in mind that although talks of tariffs, trade wars, rising interest rates, and geopolitical risks might be frightening, risk can be mitigated through the use of correlation statistics and portfolio diversification.


Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, Inc.

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