Are you worried about your stock-market exposure? Buy into something even more
bubblicious: natural resources! That seems to be the message of a
recent article in the Journal of Financial Planning by William Coaker. Coaker
went searching for one of the holy grails of the investing universe: low correlation.
assets are now correlated".)
The dataset he used goes from 1970 only until 2004, so it might well miss out
some of the more recent volatility in correlation. But even stopping at 2004,
Coaker concludes that it’s not enough to invest in uncorrelated assets; you
have to invest in consistently uncorrelated assets. And if you want
a consistently uncorrelated asset to offset your US equity exposure, the best
thing he can find for you is natural resources.
Natural resources have had a correlation of less than .20 to all 17 other
assets in this study, with the highest being just .19, for both small growth
and small value. Natural resources have had the lowest average correlations—and
the most consistently low correlations—to every asset in this study,
including every category of stocks, bonds, and alternatives. Hence, natural
resources have provided more diversification benefits than every other asset
in this study. Of special note, natural resources have had a negative correlation
83 percent of the time to U.S. bonds, due to their inverse relationship to
I would dearly love to see how that correlation has held up since 2004, though.
All good things – including low correlations – must come to an end
at some point.
Beta, via Abnormal