What Is a Non-Correlated Investment or Asset?

By Thomas P. Roussel | March 4, 2024

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Investors can choose many asset types to build their portfolios. From real estate properties to individual stocks, each type of investment impacts your value and returns in different ways.

Learning about different asset types helps you make the most informed financial decisions. Some investment types, known as positively correlated assets, move up or down together, while others don’t — for example, the stock prices of two different companies in the same industry tend to move together. However, other assets may move independently from one another, such as gold compared to a company’s publicly traded stock.

Non-correlated or uncorrelated assets are not affected by market forces in the same manner as the worth of other investments in your portfolio. Their price movements do not affect each other. These assets present unique benefits and disadvantages for investors, making it essential to research them beforehand.

Financial assets can have either positive, zero, or negative correlation, which is represented on a correlation scale from +1.0 to -1.0. Assets with a high positive correlation would tend to move up and down together as they would most likely be from the same industry and would be affected similarly by events in the industry.

Assets with negative correlation are affected by the same event but move in opposite directions. For example, two investments that have a -1.0 correlation to each other would have an identical price change magnitude, but their price change directions would be opposite of one another.

Diversifying your portfolio with uncorrelated assets can help to reduce portfolio volatility and risk.

What Are Non-Correlated Assets?

Non-correlated assets are investments that have no relation in price movements. In other words, the meaning of non-correlated assets is that as the value of one asset changes due to a certain market force, the other asset is unlikely to change.

Correlation measures the price movements of two investments in relation to one another. This measurement allows you to place assets on a correlation scale.

Correlation measures the price movements of two investments in relation to one another. This measurement allows you to place assets on a correlation scale. Non-correlated assets score at zero, and uncorrelated assets have a weak connection to other assets, meaning they score close to zero and are in more of a gray area. Assets that fall further to one side or the other on the scale have stronger correlations.

Positively correlated assets tend to move in the same direction and maintain similar percentages during movement. Positive correlations have measurements more than zero, up to +1.0. The closer you get to +1.0, the more exactly aligned the two assets are. For example, if a stock investment grows by 10% and has a positive correlation with another stock investment, the second investment would have a high probability of growing by the same amount. In many cases, assets in the same industry have positive correlations because their market rates are affected by similar driving forces.

Negative correlations move in opposite directions. As one asset increases, the other decreases, and vice versa. They have measurements of less than zero, down to -1.0. Negatively correlated assets with a -1.0 correlation would not be affected in the same way by the same market conditions. Instead, it’s likely one will be positively affected while the other is negatively affected. For instance, as stock gains increase, bonds often lose value as investors turn to stocks instead.

In contrast to positive and negative correlations, uncorrelated assets are alternative investments that have no impact on one another. Investors often use positively and negatively correlated assets to allocate their investments in a manner that lowers volatility, minimizing large swings to their portfolios when a market event occurs. However, non-correlated assets can make it more difficult to forecast upcoming gains or losses.

How Do Non-Correlated Assets Relate to Modern Portfolio Theory?

Modern portfolio theory is a strategy that emphasizes portfolio diversification. Investors following the theory seek a balance between risks and returns, allowing for maximum profits. Many followers implement non-correlated and uncorrelated assets into their portfolios to gain the most benefits possible.

The theory is based on three crucial components:

  1. Comprehensive viewpoints: Modern portfolio theory emphasizes viewing your assets in correlation to one another instead of in isolation. Consider how each asset’s potential returns and risks affect the other investments in your portfolio. Non-correlated and uncorrelated assets allow investors to add new investments that pose little risk to existing portfolio items.
  2. Historical data: Modern portfolio theory enthusiasts use historical data to forecast future asset performances. Long-term data often helps you make more accurate decisions, rather than approximating based on current trends. Past performance does not guarantee future results, but it provides information for an investor to decide which investments to add to their portfolio based on their needs and risk tolerance. 
  3. The efficient frontier: The theory uses a graph called the efficient frontier to track optimal returns for a defined level of risk. You use the graph to compare different returns from your investment portfolio, with each axis representing risks and returns. The term efficient frontier refers to the resulting parabola or line once the graph is completed. Portfolios that exist above or on the line represent the most optimal returns, while those below the line have more risks and fewer returns.

However, the theory has a few drawbacks that prevent its complete effectiveness. Plotting an accurate graph requires significant financial knowledge and precise asset calculations. In addition, the focus on historical data can impede accuracy because it doesn’t address modern conditions. Many aspects of investing are dynamic by nature, which means that what may have worked before may not work again due to different conditions or more widely available information.

What Are Examples of Non-Correlated Assets?

Non-correlated assets can take many forms, with each type diversifying your portfolio in a different way. These are examples of common non-correlated and uncorrelated assets:

1. Precious Metals

Valuable metals can enhance your portfolio, such as:

  • Gold
  • Silver
  • Platinum
  • Palladium
  • Rhodium
  • Iridium

Precious metals can help diversify a portfolio’s fixed-income and equity positions. Metals are good options for diversifying these positions because they have a low correlation with fixed-income and equity assets. Metals can add a stable element — while the metals’ value fluctuates slightly, it usually maintains a more predictable value over time. 

2. Real Estate

Real estate is another essential type of uncorrelated asset. Individual properties and non-traded real estate investment trusts (REITs) usually perform independently from stock market assets. While real estate still fluctuates in value, these assets tend to fluctuate when other parts of your portfolio are doing something else. Their non-correlation provides fewer fluctuations in your portfolio’s value, smoothing out the overall returns.

Non-correlated real estate investments also provide potential benefits like:

  • Higher yields: Real estate assets like REITs can provide predictable dividend yields — thus more predictable income. Real estate prices often increase over time, raising your portfolio’s overall value. 
  • Tax advantages: REITs also have preferential tax treatments, and you can take advantage of depreciation deductions.
  • Variety: You can choose from many real estate asset types to build your portfolio, helping you align with your financial goals. 
  • Stable income: A real estate investment typically allows you to collect monthly rent or dividends, providing a steady income stream.

3. Cryptocurrencies

Cryptocurrencies and other digital assets are also considered non-correlated assets. The two most common examples of cryptocurrencies are Bitcoin and Ethereum. However, many different cryptocurrencies are in use. Other digital forms, such as non-fungible tokens (NFTs), are also non-correlated.

These products have increased in popularity in recent years, developing in a market largely independent from others. Cryptocurrency values vary widely, depending on technological advancements, regulatory standards, and current demand. Because their value changes don’t align with other markets, they diversify your portfolio.

If you want to invest in cryptocurrencies or other digital assets, consulting with an expert is best.

4. Collectibles

Many physical objects have monetary value and diversify your portfolio. Their value remains unrelated to other portfolio items, making them non-correlated investment opportunities. Collectible prices vary over time, depending on supply and demand, popularity, item condition, and other factors. You only receive a return on the investment if you sell the item.

Collectible items are available in many types, including:

  • Artwork: Various paintings and works of art have monetary value, adding new elements to your portfolio. Artwork has the most worth when it stays in its best condition.
  • Antiques: Antiques are decorative items made with unique craftsmanship. The items must be over 100 years old for collectors to consider them genuine antiques. The older they are, the more they can grow in value.
  • Coins: Many investors collect rare or valuable coins for their portfolios. The coins might be extremely old or made with a particular material, like gold, that increases their worth.
  • Comic books: Rare comic books are another example of non-correlated collectibles. For some comic books, only a few hundred or thousand copies might exist worldwide. Their rarity makes them more valuable and increases portfolio diversity.

What Are the Risks of Non-Correlated Assets?

Despite their advantages, non-correlated and uncorrelated assets also have risks for investors, including:

  • Lower liquidity: It might be difficult to access non-correlated asset returns right away. Many non-correlated assets correspond to unique markets that might not have driving supply or demand. For example, niche collectible types might be worth a significant amount, but you cannot receive the return without a buyer to invest. This uniqueness makes it harder to access your yields, which can cause strain during financial hardships. In contrast, many publicly traded options have more popularity with general buying populations and can be sold quickly.
  • More research requirements: Non-correlated assets’ independence from other markets can be an advantage and a risk. Because they do not relate to the stock market, you must conduct individual research into their particular industry, value, and popularity. Understanding the risks and potential returns for the assets before investing is important. The additional research requirements make it more complicated to get started with an investment. If you don’t research thoroughly enough or misunderstand the industry, you might find further complications later.

Investors can discuss non-correlated assets with financial advisors to determine how the assets could affect their portfolios. Professional advisors provide expert guidance for your financial circumstances and explain particular risks or benefits of different non-correlated assets.

Can You Diversify Your Portfolio With a 1031 Exchange?

1031 exchanges occur when you trade one real estate property for another property. The trades allow you to defer capital gains taxes, unlike typical real estate sales. Individuals can gain benefits from their new property while postponing tax payments. Adding a 1031 exchange component to your portfolio can help further diversify it.

You can exchange non-correlated real estate assets in 1031 exchanges. The exchanges help you acquire new property with minimal tax requirements, assisting with financial gains. Apart from administrative fees, interest income, and other incidental costs, you can trade the properties at an equivalent value. 

The IRS outlines specific guideline that 1031 exchanges must meet, including:

The IRS outlines specific guidelines that 1031 exchanges must meet, including:

  • Like-kind properties: The exchanged properties must be of similar character. That way, the exchange is even and cannot be classified as a sale or loss.
  • Only real estate: 1031 exchanges only apply to real estate properties. You cannot trade equipment, franchise licenses, or other investment types.
  • Location in the United States: The two properties must be within the United States.

Many investors use 1031 exchanges to diversify their portfolios. You can enter new real estate markets and invest in a wide selection of property types. For example, an exchange might allow an investor to trade a small managed property for a high-value location. They could use the financial returns to invest in multiple properties, expanding their portfolio and capital gains. With the right trading choices, you can experience improved cash flow and purchasing power.

As always, it’s vital to research the 1031 exchange process thoroughly before getting started. A professional financial advisor can help you evaluate the trade’s effect on your portfolio. They can also identify potential properties for trade. You can work with a 1031 exchange investment platform to begin the process.

Diversify Your Portfolio With 1031 Crowdfunding.

Diversify Your Portfolio With 1031 Crowdfunding

Non-correlated and uncorrelated assets diversify your portfolio, providing dependable values that are unaffected by the public stock market. Whether you invest in real estate, collectible items, or other asset types, you can expand your portfolio and financial opportunities. 

1031 Crowdfunding is a leading 1031 exchange platform. Our team has extensive experience with many investment structures, with over 1,500 exchange transactions completed. We maintain a selection of available 1031 properties, allowing investors to browse and begin the process according to their timeline. Our expert advisors guide you through the exchange process and help you determine the most effective uncorrelated assets for your needs.

Register for an investor account with 1031 Crowdfunding today to get started.

This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements is speculative in nature and involves a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC Member FINRA, SIPC.

 

 

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