Correlation and Diversification are fancy words for fancy people. But you too could be fancy! Why do we care about it? What does it do for you? Is there such a thing as too much or too little of diversification? How can Correlation help you make better decisions for the long term?
Thanks for sticking around for Season 3! We still have more to come so make sure you keep checking back with us. Find us on Facebook and reach out with questions!
Correlation and Diversification are fancy words for fancy people. But you too could be fancy! Why do we care about it? What does it do for you? Is there such a thing as too much or too little of diversification? How can Correlation help you make better decisions for the long term?
Thanks for sticking around for Season 3! We still have more to come so make sure you keep checking back with us. Find us on Facebook and reach out with questions!
Checking 1
Sean Cooper:2
Chris Holling:3
Sean Cooper:4
Chris Holling:Why are you confused about four? Did you? Did you think
Sean Cooper:I just wasn't sure how far we were going?
Chris Holling:Oh, you know, I really get the feeling that you probably have more more aware with all that I do if I just kept counting. And I didn't tell you I was just gonna keep counting. Like you just, you just count. You wouldn't even think I'm trying to screw with you. You're just like, oh, we're just counting. Guess we're gonna count for half an hour. That's fine. Of all the inventions of the last 100 years. The dry erase board has to be the most remarkable.
Sean Cooper:Okay, I'm very curious as to why.
Chris Holling:Remarkable? markable.
Sean Cooper:Yes. Re- Remarkable. That's the key there. Yeah. That's well played out. I actually like that one. That was good.
Chris Holling:It brings me more joy that you're like, why? There's by far better things. How about sliced bread? What about this? This computer? I have in my hands? That's more remarkable. No, no. Like, like a marker. Remarkable.
Sean Cooper:Yep. You're remarking? Yes.
Chris Holling:I just heard our child set the school on fire. arson. Yes. Our son. That's awesome. Okay, I'm done with that. I'm sorry.
Sean Cooper:I was gonna say that. That was quite a few. We're laying it on thick today.
Chris Holling:Well, I thought that I thought that we just weren't counting. We weren't keeping track of counting was gonna keep going until you know, counting.
Sean Cooper:Oh, Okay.
Chris Holling:Oh, geez.
Sean Cooper:I was counting. That was I think there were five of those.
Chris Holling:Of course you were counting. How do I how do I start? 11234567 floor.
Sean Cooper:You are gonna count just count.
Chris Holling:Welcome, ladies to
Sean Cooper:Maybe we should introduce...there you go
Chris Holling:I'm trying. you're you're you're throwing off my Juju. It's right here.
Sean Cooper:I'm not sure you had it yet.
Chris Holling:Well, that's just plain rude. But accurate. Welcome, ladies.
Sean Cooper:Just today, normally you've got it in spades.
Chris Holling:Hey, see that See that? There's there's that rhythm again. It's just it's just like, it's right there. It's happening. Okay. Well, welcome
Sean Cooper:No, I'm not sure it was.
Chris Holling:Welcome,
Sean Cooper:You just want to keep counting and throwing things down I'm going to keep
Chris Holling:Shut up, shut up, shut up Meg
Sean Cooper:Did you just call me a nag?
Chris Holling:No, I said Meg like in Family Guy
Sean Cooper:Oh, gotcha. I thought you said nag like in A League of Their Own.
Chris Holling:You know, at this rate, I'm just gonna, I'll just, I'll just mute you. I'll just I'm the all editing master, I'll just cut you out. I dodn't even care.
Sean Cooper:But can you get through if I'm also talking even if...
Chris Holling:see, you can't even tell that he's speaking right now as I have removed the file. Welcome, ladies and gentlemen, boys and girls, to another episode of the truth about investing back to basics. My name is Chris Holling.
Sean Cooper:And I'm Sean Cooper. And hopefully I'm not muted anymore.
Chris Holling:You're not muted, but you're at least consistent at this point. Today, we we're actually it's kind of crazy. We're doing a season finale today we're we kept this one a little shorter this season just to keep it a little bit more compact. And I'm actually kind of shocked that we're here already, to be completely honest. But we're doing correlation and diversification today. And well, those are two things that I know nothing about. So I in every other episode, what we've done is I have said, This is what I understand it to be. And well. I correlate that diversification has something to do with money. All right.
Sean Cooper:At least the way we're talking about diversification. Yes. I mean, you can have diversification in lots of things. You can talk about diversification in correlation in terms of just general their general definitions I'm sure you...oh, really
Chris Holling:see. That's why you get muted. That's why you get
Sean Cooper:Yeah. Yeah
Chris Holling:Yeah, yes, diversification could go towards a lot of things. Honestly, the only thing I truly truly know about diversification would would be the general term of it's good to diversify your portfolio. And when you are diversifying your portfolio, the understanding that I have is, it is making sure that you have not all your eggs in one basket. So you're not putting everything into a stock that you're pretty sure it's gonna do pretty well. But, you know, maybe several, and some that might offset some that might do well when the others aren't, and vice versa. But that's, that's about as far reaching as I can get. Like, I've just dumped my correlation, diversification knowledge, and learn me, Sean.
Sean Cooper:I mean, that was that was the basis of it that covers diversification. That is, what we're shooting for, is it's exactly that you don't want all your eggs in one basket. Because if you look at times, like 2008, a lot of things did really, really poorly. So you didn't want all of your investments in, you know, one stock or even a group of stocks, for the most part because most stocks did really poorly. Harry Markowitz is famous for saying that diversification is the only free lunch when it comes to investing. And that's mostly true, I'd say there's still a cost of trading for most people that it's going to make it a lot less than free lunch, but you get the gist of it.
Chris Holling:Yeah.
Sean Cooper:But yeah, that is the reason for diversification is you, you don't want everything all in one investment that could do get, you know, completely thrashed by a single event correlation is just how the diversification works. It's the explanation for it, not necessarily why you want it, but why the diversification works. So the Why is what we've been talking about. And that's avoiding losing everything all at once. So you've got different levels of diversification. Basically, yeah, the converse of that is concentration. So concentration risk, you could have concentration risk, in the form of being invested in a single company, if that single company goes bankrupt, you lose, you know, all our most of your investment. Whereas if you're in lots of companies, the odds of lots of companies going bankrupt all at once is much slimmer, you'd have geographic concentration risk. So if you're like a real estate investor, and all of your real estate is in one little town, if that, you know town, like the the town I grew up in was mostly founded on logging. So if the logging industry tanks and 50% of the town has to move away, then your real estate investments are going to suffer. Or if you your all your real estate is in tornado alley and a big tornado an F5 comes through and wipes out all your real estate, that's you're gonna suffer there too. So there's geographic risks, there's concentration risk.
Chris Holling:That's interesting, I've never even considered that but that that makes complete sense. So I really feel like when I've looked at real estate investing stuff, when I when I've talked with real estate investors, a lot of them tend to use a very, very common phrase where they're saying I specialize in this area of the of the Denver Metro area, I specialize in homes in Aspen, I I have properties that I don't come across almost any that are like, oh, I've got some in Iowa and I've got some in New York, and I've got some here and some here, but but the way that you're talking about it is you it might be a good consideration to kind of stretch out and, and diversify even even that having it so you don't have the concentration, geographic risk and geographic risk.
Sean Cooper:So there's both sides to the coin this coin. Most coins really, but
Chris Holling:that's all coins.
Sean Cooper:All coins. I mean, but
Chris Holling:the heads the tale and the Ridge
Sean Cooper:theoretical, I was referring to it in the theoretical sense of most concepts have two sides to anyway.
Chris Holling:I know
Sean Cooper:When you look we've talked before about and I don't know if we've actually talked about this on the podcast or just offline, but we've talked before about you know, people making outsized gains in a single investment like they, they bought into, you know, whatever it was, I mean, we're going to talk about cryptocurrencies, eventually. So
Chris Holling:eventually
Sean Cooper:they bought into Bitcoin and it went from, you know, a few 1000 and now what it's trading it I don't even know I don't follow it really but uh,
Chris Holling:64,000
Sean Cooper:All right, 64,000
Chris Holling:As of last week plus, Yeah, something like that.
Sean Cooper:Right, right. So that investment made them tons and tons of money. But you don't typically see that type of outsize gain happening. In a diversified portfolio, one piece of the pie might do that. So say 1% of your portfolio might do exceedingly well. But the entire portfolio didn't do didn't go crazy like that. So having that concentration risk, having, you know, dumping it all into one potential thing, it has a risk and reward trade off. Yes, there is, you know, you you buy into a new company, a brand new company, there's a very high potential reward, there's also a very high risk. And so that's where diversification comes in. And that's what I'm getting at with those, those real estate investors that you talked about. They're relying on the fact that they are experts, or at least view themselves as experts in one particular area. And so they're, they're taking advantage of that expertise. So there is an advantage to that concentration. But my point is, there's also a risk associated with it. And that's the idea behind diversification is offsetting some of that risk?
Chris Holling:That makes sense? I can see that. I mean, I imagine there's some benefit along the lines of kind of keeping your your taxes in order, because then you're not doing multiple state tax, just just real estate specifically.
Sean Cooper:Yes, Yes, that's true. Yeah, for real estate. Yeah. If you're talking about stocks and stuff, it doesn't matter until you start getting into foreign investments, and then you have foreign taxes. But that's not it's not horrible. I mean,
Chris Holling:sure. That makes sense. Okay
Sean Cooper:my taxes are complicated enough that a foreign tax doesn't throw me for that big of a loop. But
Chris Holling:yeah, that that makes sense. Okay. Well, I mean, that's a pretty, pretty simple, straightforward explanation on the diversification side. So what's what I mean, what is correlation? I mean, I just apart from the term of correlation, which I could pull up another dictionary definition for you. But
Sean Cooper:you could, was first I mean, taking that diversification to another level, I mentioned, foreign investments, even being invested all in one country potentially has its own risk. Because, yeah, we've talked about inflation before. If your country, the country, you're invested in the the currency that underlies that country suddenly goes haywire, then you're still experiencing the risk of that particular region.
Chris Holling:Right?
Sean Cooper:If You will. So having potentially a foreign currency, even or investments that are denominated in a foreign currency can offset certain types of risk as well. It's just different levels of diversification and what you're trying to achieve. But yeah, in terms of correlation, we'll talk more about diversification and what what that looks like in terms of real life scenarios, obviously, the most recent that people are going to think of would be 2008. Certainly talk a little bit more about that. But in terms of how you actually go about diversifying, it stems from correlation. And correlation is just how different investments in this case because that's what we're talking about, move in relation to one another. So correlation in number terms ranges from negative one to positive one. So two two investments that have a positive one, they're correlated 100%. That means they're literally going to move in lockstep with one another. Now, they might not gain, the exact same amount, but they always have positive returns at the same time, negative returns at the same time and flat returns at the same time. That would be an example of 100% positive correlation or plus one, negative one, negative one is going to be the exact opposite, where one zigs the other Zags. So anytime the one does, well, the other one does, poorly, maybe not proportionately. So you know, it's not necessarily one gains 10% the other one loses 10% maybe it's one gains 10%, the other one loses 1%. That's not necessarily critical to the equation. It's just that they always do the exact opposite to one another in terms of whether one is going positive or negative.
Chris Holling:Okay, I guess I guess I'm I'm having a hard time separating the two it sounds. It sounds to me, and maybe you explained it well, and I'm just not understanding it. But it sounds to me like they those two explanations are kind of the same, like one one is going the opposite direction and, and offsetting the other one aren't aren't both of what you just described doing that or, or am I misunderstanding?
Sean Cooper:Are you talking about when I described positive correlation versus negative correlation?
Chris Holling:Yes.
Sean Cooper:Okay. Positive is they're going the same direction? Always the same direction
Chris Holling:Oh, okay. Okay, I totally missed that. So, so you're saying a, it? How do I this probably isn't a good example. But like at&t and Verizon, if at&t is going up, then Verizon will likely also go up along the same for the same reasons, whatever is going on and down to down, whereas the, the negative correlation would be. I don't know what the opposite of at&t is. But, but, but something that does well, when when at&t does not do well, is the offset is the negative correlation.
Sean Cooper:Yes.
Chris Holling:Okay. Okay, sorry. I just I just misunderstood when you're explaining it, that that's my fault. All right.
Sean Cooper:Yeah, no, I tried to throw in a kind of a caveat there that the the percentage that they they move does not necessarily have to be in lockstep. And that probably threw things off. But it's just that positive correlation. They both go up together, they both go down together,
Chris Holling:okay,
Sean Cooper:just not necessarily the exact same percentage.
Chris Holling:Sure, that makes sense
Sean Cooper:negative correlation, they go opposite of one another. Zero correlation means there's literally no correlation, you cannot use one to predict the other,
Chris Holling:there's no rules
Sean Cooper:Exactly. And then you have everything in between those, those three scenarios, those are your perfect scenarios, or, I guess, in the case of no correlation, you're inperfect scenario, because you have no idea what it's going to do,
Chris Holling:right.
Sean Cooper:But you have everything in between. So basically, anything from zero to positive one means there's some level of correlation between them.
Chris Holling:Okay,
Sean Cooper:it might not be perfect, but there is some level of correlation. And then zero to negative one is negatively correlated. Again, not necessarily perfect, but it is negatively correlated. So when we're talking about diversification, anything less than positive one can technically help a portfolio. But it's not until you get to the true, you know, you get to true negative correlation, you can actually really enhance a portfolio in terms of reducing risk or increasing return without sacrificing or without taking on additional risk and that sort of thing. So, you look back historically, they had modern portfolio theory, basically looked at diversification from the standpoint of Okay, well, we will stocks and bonds, they're not perfectly correlated. In fact, you know, depending on the timeframe, you're evaluating, it can be a low in the, you know,.3 .4 range, but it can also get up higher, depending on the bonds and the time period that we're evaluating, you know, .8.9 in terms of the correlation. And so the idea is, if you look at the efficient, efficient market, or the, what's the word for it?
Chris Holling:I don't know,
Sean Cooper:the efficient frontier, sorry, the efficient frontier. So if you look at a graph of
Chris Holling:the final frontier,
Sean Cooper:not not really,
Chris Holling:okay.
Sean Cooper:Yeah, but so you take a graph of two. This is much easier to do visually than it is verbally, but we'll I'll try
Chris Holling:It's you got it. You got to Bob Ross it you got to paint a picture. So
Sean Cooper:he actually got to paint a picture though.
Chris Holling:Yeah. Well, you're the Bob Ross of of verbalization. And
Sean Cooper:I'm talking about the happy little clouds but not actually getting to paint them and can
Chris Holling:Paint the happy little clouds, Sean? Okay. All right. So we take two, two asset classes, okay. stocks
Sean Cooper:Okay.
Chris Holling:Okay, and bonds are what a lot of people talk about, but let's say they were perfectly positively correlated. One had a expected return of, say, 10% with a standard deviation, that's what we're using for risk of, you know, 15%. And then the other has a expected average return of 5% and a standard deviation of seven. So if you plot those on a graph, you got your two dots, you know, one's up into the right of the other. If you start mixing between those two asset classes, if they're perfectly positively correlated, Any portfolio you build is going to fall on a straight line between those two, two points. Okay, as you get away from perfectly positively correlated, so even if they're positively correlated, but they're less so so you get down to .8 .4, .6, whatever, that graph, the of a portfolio mix between those two asset classes is actually going to move up and to the left now up and to the left in this case would be either higher returns, or lower risk or a combination of the two. So if you look at stocks and bonds, for example, and where the idea of modern portfolio stem theory stems stem from is you could actually create a portfolio that had between anywhere between 90% bonds 10% stocks, up to about 30% bonds, 70% stocks, that was actually had higher returns and lower risk than any point along that prior graph.
Sean Cooper:in fact, anywhere along that line, even as you go up to 90%, stocks, 10% bonds, is going to be superior from that original line of perfectly positively correlated asset classes. And that's what we're talking about is we're talking about enhancing returns, or reducing risk or some combination of the two, by using these asset classes that are not perfectly correlated. Now if you get to a point where you have two asset classes that have positive average annuallized returns, like we're talking about, but perfectly negatively correlated, you end up with a graph that is basically creates kind of a sideways v. And you've got a line that goes from, in this case, our first asset class with the lower, lower return lower risk, straight to your y axis, and then straight back to your other asset class. And so that point where it intersects with the y axis, you literally have a positive return with zero risk.
Chris Holling:Interesting, okay
Sean Cooper:that would be your perfect portfolio, you would have a portfolio with positive return and zero risk. The problem is those two asset classes don't exist.
Chris Holling:Sure. Right.
Sean Cooper:I know, I just burst everybody's bubble all there at once.
Chris Holling:Yeah, yeah. Yeah, supposed to be a happy clouds picture that you were painting. Instead, you took it in you, you made a great painting, and then you lit it on fire.
Sean Cooper:That's harsh. The clouds just raining a little bit. The point is, your goal is to move up and to the left and any reduction in correlation is going to improve that. So that's, that's the target of diversification is to move closer and closer to that that point?
Chris Holling:Sure. That makes sense. So as as a as a whole, when people are, are coming to you. Sean, you're so great. You You helped me with all this stuff. Do you? Do you discuss with them? About diversification? Is that is that kind of a blanket rule that you shoot for with with everyone? Or is it is diversification? Something that's, that's better for some than others? Or where, where where does that all fit? For
Sean Cooper:Yeah, yes. For me, it's going to be a blanket rule. And that stems from two things. Number one, I think it's the right thing to do to avoid unnecessary levels of risk. And number two, if I didn't and had a lot of concentration, I'd easily get sued and lose my licenses.
Chris Holling:Oh, yeah, that's bad. Yeah, yeah. Yeah. They're bad
Sean Cooper:Like I said, the the people who are making outsized returns betting on one investment or one gamble, if you sorry. Hang on. We weren't talking about that before. We will. That's That's not what I I do on a investment basis through my RIA. I, like I said, I wouldn't last real long, because there's outside outsized ris associated with that. That's were talking about that before we even got started. And I think that's what people if somebod is going to do that, you kind o like what we were talking abou before. It needs to be mone that you don't care about neve seen again. it's a yes, sorry
Chris Holling:I think it's a very good point that I wasn't even sure if I was gonna mention it either. So this is very fresh
Sean Cooper:right today, guys. So just just kind of follow along here. But we were talking about this type of stuff today because there were there were a couple of of different stocks and and some kryptos that I was paying attention to, that I decided to
Chris Holling:to take some of this money that I go Hey, I like throw some money at this last week. And I was I was honestly just getting Sean's opinion on the matter and, and kind of his his viewpoint. But while we were talking about it, I was explaining that something that's really important to me. And this is kind of what Sean's alluding to, is that when, when we were talking about our framework, and we're talking about our budgeting, especially in the second season, and we talk about making sure that you're setting aside certain amounts to go whatever direction that you feel is important, and and allocating your funds the way that that helps you the best part of something that I do that I'm actually wondering if I even addressed I think I did, but about 10% of my income goes into a wealth building category is is what I've defined it as and I do do some separate that's just some general investing from a job that goes along with correlation diversification that's not this 10% this 10% is the stuff that we referenced a couple episodes ago where it was venture capitalism stuff where where I bought that mike for somebody to help get his business off the ground and this stock, or I think that there's a bunch of potential in this crypto or or something that starts to veer more on the your concentration and your your eggs in one basket type thing. I'm treating this money as though I'm never gonna see it again. I have a good I like to say educated hunch on these these activities
Sean Cooper:educated hunch I like that.
Chris Holling:Yeah, it's it's an educated gamble. But that's that's also what it is, you know, and I know, we talked about it when we discussed the the brief venture capitalism thing, but I've, I've really come to the conclusion that with that, if I help my buddy get off the ground and his his business takes off, then great. That's that's what was important. And even if I don't see any return from it on my end, and if I put this into a stock that I believe in, but I don't know, if they're going to be successful, or a crypto I have an educated hunch on then then that's, that's also what I put that into, but I'm also well aware that if I never see any of that cash ever again, that that's just kind of cost of doing business and part of part of the plan. And I'm okay with that. Because that's my plan. And people need to set up whatever they find to be important. Sorry, can you hear that
Sean Cooper:Well, yeah, and and you already have, I can hear a little bit and sorry. But I was just gonna say that you already have your other ducks in a row, like everything else is already taken care of this isn't your This isn't your rent money that you're
Chris Holling:no
Sean Cooper:saying, hey, let's let's give this a shot.
Chris Holling:Right? What is that? Every everything on black? Let's go. Let's go. Like, that's not that's not what this is at all? No, you're absolutely right. It's, it's, it's money that I have set aside because I, I feel pretty confident with it. And ultimately, all all it's, it's going to become at that point is that if I do see a return on that, by chance, because my educated hunch was solid, then what I'll do is that money is going to go back into that same pot of kind of liquid funds in a way of, you know, if I see another stock that I go, Oh, yeah, this this is my next big venture. Well, if I'm really worried about wanting to be safer with it, then I can take whatever profits I made out of that and just leave that in that category and use that money. And it's, it's sort of my free lunch in a way if I get to that point. But I I'm very much under the opinion philosophically because I'm finding that that's kind of my job here anymore. But philosophically, I I think people have a harder time being comfortable with investing if they're not willing to take their money and and let it go. And so I really feel like if I wasn't comfortable with putting it into a stock that I believe in, because all my other ducks are in a row and I'm ready to go but I'm willing to kind of let that money go and do other things for me, makes me less likely to be really concerned about holding on to other investments that might be a smarter long term move that's fit in with correlation diversification. Did that all make sense? That felt like a bunch of words that I wasn't sure if it was just mush?
Sean Cooper:No, I got the gist of it.
Chris Holling:Okay.
Sean Cooper:I wouldn't say everybody needs to be to that same point in order to invest by any means,
Chris Holling:right. That's just for me
Sean Cooper:it's just, it's just a matter, right? It's a matter of how you go about investing. I mean, like we're talking about if you can build out a diversified portfolio. For example, if I take a an aggressive diversified portfolio, versus a benchmark that I utilize, the average annualized return is roughly the same, but the standard deviation, the risk of that portfolio is roughly 30% less that diversified portfolio, the risk is roughly 30% less, so you're going to see roughly 30% less volatility. And the point of that is, yes, you haven't enhanced returns in that scenario at all. But you've reduced the volatility, you've reduced the potential stress and sleepless nights. So it's purely a psychological play it's designed to eliminate the or at least reduce the human aspect of panic, the the emotions involved in a falling market. And what we have talked about previously, of the average equity fund investor only realizing a three and a half percent gain when the s&p 500 is averaged closer to 9%. And that stems from people making irrational decisions, either in euphoria or panic. So reducing risk can help also reduce those irrational decisions.
Chris Holling:Right. And I, again, like we've mentioned, almost in every episode at this rate, and I'm I'm okay with it is that these, these are more tools for the toolbox type thing. I'm, I think it's important to, for me, for me, personally, this is me, me, me, me, me personally.
Sean Cooper:There's lots of options. So yeah,
Chris Holling:There's so many options. But with with that, it's, it's a, I, I'm just stumbling over all my words, I can't even figure out how I'm gonna how I'm going to speak English here. Apparently, I think I'm in the camp of the, you also miss every shot, you never take type of thing, which is why this is the category of I have my other stuff organized, I am comfortable with if this money disappears, that it's not going to be an issue. But I'm, if if there is a large return to be had, then it doesn't always happen on the safer approach. And I'm not saying by any stretch that the safer approach is worse, or that one is better, because in fact, Sean just said, Hey, on an average, the the riskier amount, your overall return is going to be less than than sticking within an s&p over time. And this really is, for me, psychologically, and, and getting involved in taking that shot. Because I'm, I'm comfortable with it. And that's me tools for the toolbox. I think I just said the same thing for like four minutes straight. So
Sean Cooper:that's okay, no, I've got nothing against taking that shot, I just encourage you to have like, like Chris has, and like I have because I have taken the shot.
Chris Holling:Because that's the only way you're going to enter the danger zone.
Sean Cooper:But you have everything else taken care of first. So my retirement accounts, they're diversified. And they're taken care of. It's just the piece of the pie that, hey, if I lose all of this, it's not going to put me in a tight spot. That's, that's where Chris is getting at there.
Chris Holling:Right.
Sean Cooper:And along these lines, Chris has been is always good about making things, putting things in kind of real terms, whereas I deal in numbers and don't necessarily give real world examples.
Chris Holling:I'm the realist dude you'll ever meet.
Sean Cooper:Yeah, Yeah. But but for me
Chris Holling:For the streets
Sean Cooper:in an effort to try to give you an idea of to make this more real. For a lot of people, they look at 2008 and their assumption is that everything lost money, the market crashed everything lost money, and that is not true. Yes. Yeah. Yes, correlation went up for a lot of
Chris Holling:That's a good point things. So in in 2008, if you had a stock and bond portfolio, it you know, 2007, it was probably far more diversified, lower correlation than it was in 2008. Because the correlation between stocks and bonds actually went up in 2008, which is the exact time when you don't want correlation to go up. Ideally, you want things to become less correlated when the market tanks. But the point is getting this back to, you know, your own situation and, you know, real world, what can you do with this diversification correlation information. It's to try to limit the impact of periods like 2008. And while some people will tell you, and may even believe that everything lost money in 2008, and depending on the investment that they had access to, that may have been true for them. There are lots of things that actually did well in 2008. So the purpose is to find those non correlated asset classes that can help you diversify your portfolio. Just to give you a few examples, you know, pretty much the vast majority of your equities, most of your bonds, a lot of real estate, even some of your alternative asset classes did really bad in 2008. However, you look at the some things that actually didn't do poorly, they just kind of flatline in 2008. You've got your Barclays aggregate bond index. So the bonds in that index did fairly, basically flatlined, foreign corporate bonds were essentially flat merger arbitrage, which is an alternative. strategy was basically flat things that actually did well, for 2008. Long term treasuries, US Treasuries actually did well, hard assets like gold and silver, gold, both did very well, private equity did really well, volatility spiked. So there are ways to invest in volatility not directly but using derivatives, which we'll talk about another time. And managed futures, managed futures, depending on the managed futures strategy. portfolio manager you might have been following or likely weren't following, you're talking about returns anywhere from 20 to 150%, in 2008, so there are things that did very well and could have either enhanced the return, or at least softened the blow of 2008, that potentially could do the same in into the future. So it's a matter of finding those things that can help make your portfolio more resilient to market cycles. Well if I. Oh, sorry, go ahead.
Sean Cooper:And we'll talk more about alternative assets and alternative strategies later. But I mean, to give you an idea, the big endowments Yale, Harvard, if you looked at their allocations in 2008, I think Yale had 60% of their assets in private equity. They made money in 2008, they lost money in 2009, when private equity caught up to the market and crashed, but they actually made money in 2008. Whereas most investors don't have any in, in private equity. In fact, most compliance departments and even errors and omissions insurance won't allow their financial advisors to invest more than about 10% in alternative assets and in general, so these things, they on a stand alone, they can be very risky, but they can also enhance a portfolio in a variety of ways, depending on how they're utilized as a matter of understanding them and utilizing them effectively.
Chris Holling:Yeah, that that totally makes sense. And also, I wanted to mention something kind of bring everything back full circle and, and psychologically and then that way, you know, I'm not jumping all over the place on these things. But there's there's also several I ultimately, it's it's just, it's different books that I've been reading. That that a pretty consistent phrase, when you're looking at finances and and economy books. And, and these these different books that I've been involved reading one of the one of the most consistent things that has come up is talking about that when there are downtimes when there are recessions, that's when new millionaires are developed the the the new opportunities come out of those times when there were several people that made a bunch of money during this stretch during COVID. Because it It changed lots of different aspects about the market and paying attention to those things and placing your investments in places where you think they will do well can absolutely utilize those situations because that's, that's a larger scale version of diversification in a way and, and I mentioned that because again, full circle, I personally feel like I wouldn't be able to comfortably take advantage of some of those circumstances if I'm a not paying attention. And the world is just happening to me, which I just don't accept, honestly. And b that if those occasions do come around, and I'm paying attention, then I can be comfortable with saying, Hey, I think that there's a lot of opportunity in this, because we're in this recession, or this thing just happened and paying attention to where those rises and dips happen. And me saying I'm going to take X amount of money and put it into this possible opportunity that other people don't tend to have their ducks in a row in their their cash available to go towards something like that. And this, this is kind of my own small versions of that now, because if I'm comfortable with getting involved in those things, psychologically now then I'm I'm paying attention to the next time that things are, are going well, the buy low sell high type mentality. And
Sean Cooper:wasn't it Warren Buffett, who said something along the lines of when people are greedy, be fearful. And when people are fearful, be greedy.
Chris Holling:That sounds right.
Sean Cooper:Yeah.
Chris Holling:Yeah,
Sean Cooper:It was something about that. Anyway, it gets at the kind of what you were talking about there.
Chris Holling:That's exactly it. And so it's, that's, that's the full circle I'm getting at, if you are paying attention to those things, and you're willing to get involved in those things, because that's of interest to you, then that's, that's where it's good to get involved in, in practicing those things, or looking into what, what ways to approach it and how you do or don't feel comfortable with those things. Because there's absolutely nothing wrong with going, Hey, I want a diversified portfolio so that I don't have to worry about anything, and I'm taking care of me, I'm taking care of my family and I'm gonna go to bed and I'm gonna take a nap. You know, like, get get some get some good rest and, and have that, that. I don't know that comfort that shuteye that? What am I trying to say that security? Just,
Sean Cooper:I would just say that, yeah, all of these decisions really come back to the point of making them based on both your financial ability to take on risk, as well as your willingness or your risk tolerance,
Chris Holling:right
Sean Cooper:Making sure those align, because there are lots of varying degrees to which you can take on risk and potential returns. But they need to align with what your goals are and what you're capable and willing to take on and understanding what you are, what risks you are absorbing.
Chris Holling:Because not everybody is in the danger zone. And that's okay. There's there's no reason to feel like you need to be it's it's just what's important to you and, and what tools in your toolbox that you want to use that that are available to you. That's that's what we do. We we bring you the tools you're a tool, Sean.
Sean Cooper:Thanks
Chris Holling:Man. Well, what else did we did we do it? Did we? Did we address correlation diversification? Did we? I think so. Yeah, I think so too. I like it. Cool. Well, I'll just wrap it up. Where we'll we'll almost sound professional. Thank you, ladies and gentlemen, for listening and coming out and catching us to another episode about the truth about investing. Back to Basics. My name is Chris Holling.
Sean Cooper:And I'm Sean Cooper.
Chris Holling:And we will catch you next time. Ooh, in season four, because season finale of three, three goes into four remember the counting thing that's so three goes into. podcast disclaimer, disclaimer. The disclaimer following this disclaimer is the disclaimer that is required for this podcast to be up and running and fully functioning and moving forward. This is going to be the same disclaimer that you will hear in each one of our episodes. We hope you enjoy it just as much as we enjoyed making it all content On this podcast and accompanying transcript is for informational purposes only. opinions expressed herein by Sean Cooper are solely those of fit financial consulting LLC unless otherwise specifically cited. Chris Holling that's me is not affiliated with Fit financial consulting LLC nor do the views expressed by Chris Holling Me again, represent the views of fit financial consulting, LLC. This podcast is intended to be used in its entirety. Any other use beyond the author's intent, distribution or copying of its contents of this podcast is strictly prohibited. Nothing in this podcast is intended as legal accounting or tax advice, and is for informational purposes only. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. This podcast may reference links to websites for the convenience of our users, our firm has no control over the accuracy or content of these other websites. advisory services are offered through fit financial consulting, LLC, an investment advisor firm registered in the states of Washington and Colorado. The presence of this podcast on the internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow up or individualized responses to consumers in a particular state by our firm in the rendering of a personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements, or pursuant an applicable state exemption. For information concerning the status or disciplinary history of a broker, dealer, investment advisor or other representatives, a consumer should contact their state securities administrator. Amen. My wife warned me that if I took another picture of her she'd be furious. That's when I snapped
Sean Cooper:you would to