GLOSSARY TERM
Correlation
Correlation describes how two investments tend to move in relation to each other. If they often move in the same direction, correlation is high. If they often move differently, correlation is lower.
What does this mean in practice?
Correlation helps investors understand whether different parts of a portfolio behave similarly or not. If many investments move up and down together, your portfolio may be less diversified than it looks. If some investments behave differently, they can help balance each other.
Example
Imagine you own two stock funds that both invest in very similar companies. They may rise and fall at almost the same time, which means they are highly correlated. A stock fund and a bond fund may sometimes move less closely together.
Why it matters
Correlation matters because diversification is not only about owning many investments. It is also about owning investments that do not all react the same way. Lower correlation can help reduce large swings in your portfolio over time.
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