Do you have any non-correlated assets? Making smart financial decisions is key to attaining and maintaining a reasonable degree of wealth. One such smart decision is making investments in assets with great potential to multiply in value over time.
Furthermore, you can invest your capital in several assets to yield exponential returns such as shares, stock market, real estate, mortgage fund investing, and more. However, investment is a risk and there are also chances of losses.
However, you must be smart with your investment to prevent or minimize losses to the bearest minimum, and you can do this by diversifying your portfolio. Non-correlated assets are effective tools for stabilizing investment portfolios and reducing losses.
What Are Non-correlated Assets?
The term “correlation” is commonly used when discussing investment options, and it refers to the dependence of different assets relative to the stock market. Correlation defines investment as positive, negative, and zero correlation.
The stock market determines the values of several investment options, hence, these options exhibit correlation to the stock market i.e. if there’s a fall in the stock market, the value of the assets drop and vice versa.
Correlation also refers to the impact of two or more investments on each other. Let’s look at the different forms of correlation to understand the concept better.
Positive Correlation
A positive correlation exists between two or more assets, where at least one is affected by the stock market. Assets with positive correlation are affected similarly by a change in the value of any i.e. a rise in the value of one asset will cause the value of the others to rise. The same goes for a dip in value as well.
A positive simply means whatever happens to one asset happens to the others in the portfolio. Investing in positively correlated assets can be highly profitable if there’s a rise in the stock market. However, a loss means there will be multiple losses in your portfolio. This type of investment is not advisable.
Negative Correlation
A negative correlation refers to two or more assets whose values move in opposite directions with respect to the stock market. This type of correlation is the direct opposite of positive correlation; when the value of one asset drops the value of the others increases, and vice versa.
Investing in negatively related correlation is a smart financial strategy because there is higher diversity in your portfolio and fewer risks of losses. If the value of one asset is depreciating, the negative movement of the others will serve to offset and balance your portfolio.
Non-correlation or Zero Correlation
This brings us to our main focus of the day, non-correlation assets. These are assets that are not affected by the stock market, and their value isn’t affected by a change in the price of other traditional assets ( those affected by the stock market).
Investing in non-correlated assets is another way of diversifying your portfolio and reducing the risk of potential losses. Non-correlation occurs when the values of different assets are independent of each other.
The degree of correlation can be measured statistically, and this is called the correlation coefficient. A positively correlated portfolio will give a coefficient equal to 1. A negatively correlated portfolio will give a portfolio less than zero. While non-correlated assets have a coefficient equal to zero.
A proper portfolio must be diverse to reduce the risk of losses and increase the probability of making profits. Therefore, a good portfolio must contain a range of negative and non-correlated assets.
Benefits of Including Non-correlated Assets To Your Portfolio
Here are some reasons why you should invest in non-correlated assets.
Diversity
The volatility of the stock market is often an enemy of the investor. Assets with high volatility have a high risk of depreciating drastically within short periods, and their price movements are often unpredictable.
Investing in non-correlated assets is a smart move to reduce the volatility of your portfolio and increase diversity in assets. By investing in non-correlated assets, a dip in the price of one asset does not affect the price of your other non-correlated assets, therefore, you are insulated from further losses.
Highly Profitable
Including non-correlated assets in your portfolio increases your chances of making a profit while mitigating losses. Most of these non-correlated assets have a high return of interest over time, examples are real estate, precious metals, private equity, and more.
Since these assets are not affected greatly by the stock market, there is a lesser chance of them dipping in value when there’s a negative movement in traditional stock prices.
Tax-Friendly
There are non-correlated assets that operate through SEIS, VCT, and EIS which save you a lot of tax deductibles. These schemes allow you to pay less taxes and make the most of your profit.
Disadvantages of Non-correlated Assets
While correlated assets have more advantages, investment is always a risk no matter how small, and there are potential downsides to all assets.
These non-correlated assets are not traditional assets, hence they don’t have the same liquidity potential. This means that it can be difficult to make quick returns or liquidate your investment within a short time. Most of these assets can only be liquidated after several years, which is not profitable in the short run.
10 Non-Correlated Assets for You
Below are some recommended non-correlated assets that you may need to consider adding to your investment portfolio.
1. Art, Antiques, and Collectibles
Artwork, antiques, and collectibles are non-correlated assets with which you can diversify your portfolio. These types of assets can appreciate exponentially over time, with no particular criteria for determining their value.
However, artworks and the like don’t have a particular measure of value, meaning the value can drop or increase based on human sentiment or other unpredictable factors. Furthermore, you can’t generate passive income on these forms of assets because they only return profit when sold.
2. Gold and Other Precious Metals
These are also non-yielding assets, meaning they only give profit when sold. You will need other investments aside from these types if you want to build wealth using passive income. On the other hand, gold is one of the most secure forms of non-correlated assets, and it is even used by traditional banks.
3. Digital Assets
Digital assets are a newer class of investments that include digital currencies (cryptocurrency, NFTS), websites, software, and other computer or internet-based assets. These assets are still developing in terms of stability, and there is a high risk of loss.
4. Real Estate
Real estate is one of the more popular options among non-correlated assets. Real estate assets appreciate over time, and there are several ways you can make a passive profit from them. Real estate is also largely impervious to the effect of the stock market.
You can include real estate assets in your traditional investments to create a non-correlated portfolio. Doing this will ensure you’re making a profit even when the stock market is dipping.
5. Mortgage Fund Investing
Mortgage fund investing is another form of non-correlated investment, and you can passively make income from this form of investment. Mortgage funding involves lending capital to real estate moguls or developers with an agreement of interest on your investment.
You don’t directly own the real estate in this contract, instead, you are making a profit from the loan you’ve given to fund the project.
6. Life Insurance Settlements
Life insurance is a non-traditional form of investment with zero relation to the stock market. Investing an amount larger than the surrender value will lead to a higher payout when the terms of release are met ( the death of the insured).
7. Music Investment
You can make passive income by investing in musicians. You can purchase partial rights to an artist or music, and earn a share of the profits made from the artist or music. This type of investment is based on the success of the artist or song.
8. Litigation Investment
You can invest in lawsuits, and support plaintiffs with legal expenses to get a share of the funds acquired from the lawsuit. It is a legal type of investment in which you finance or bankroll the plaintiffs in exchange for monetary interest.
9. Business Investment
You can fund new businesses to own a part of their shares and earn a percentage of their profit. Investing in small businesses is a way of making passive profit independent of the stock market.
10. Private Equity Investment
Some companies purchase smaller businesses, renovate them, and sell them for a higher profit. You can invest in these companies, and earn a share of the profit that comes with selling these small businesses.
Improve Your Investment Portfolio With CapitalMax
Improve your portfolio today by investing non-correlated assets. We’ve looked at the meaning of correlation in investment, and the different forms of correlation. We’ve also shown you the different types of non-correlated assets you can profit from.
Reach out to CapitalMax as soon as possible to improve your investment portfolio and learn more about making proper financial decisions.