1 Effective Way Investors Can De-Risk Their Portfolios
Diversification should play an important role in any investor's strategy. But simply buying stocks from other industries isn't necessarily a guaranteed way to protect yourself from a market crash or downturn. American Airlines and Royal Caribbean are technically in different industries, but they're both struggling due to the pandemic and are down more than 30% over the past year (while the S&P 500 has risen 16%). Holding both stocks in your portfolio would effectively compound your risk.
That's why simply selecting stocks from other industries is not enough. Investors should also consider how closely correlated stocks are. A correlation shows the relationship between values and how they move together. For stocks, it's important because you can use correlations to help predict whether two or more investments might move in the same direction.
Image source: Getty Images.
Source Fool.com
