Mar 30, 2021

What Are Uncorrelated Assets? (With 7 Examples)

Looking to learn about uncorrelated assets?

Portfolio diversification is one of the most effective methods of managing your investment risk. And one of the most effective ways of achieving this is by investing in uncorrelated assets. 

But, what are uncorrelated assets, and how do you find ones that suit you? 

Several Fintech companies have made it super easy for everyday investors to invest in art, collectibles, real estate, and more with just $1000 or less capital!
In this guide, we’ll go over what uncorrelated assets are and cover some of the most popular uncorrelated assets available in 2021.

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This Article Contains: 

(Click on a link to jump to the specific section) 

·       What are uncorrelated assets?

·       What are correlated assets? 

·       Why you should invest in uncorrelated assets

·       7 great uncorrelated assets to invest in

o   Art

o   Cryptocurrency

o   Real estate 

o   Managed futures

o   Gold

o   Sports memorabilia

o   Farmland

Let’s get started. 

What Are Uncorrelated Assets?

Uncorrelated assets (also known as non correlated assets) are financial assets whose prices move independently of one another. 

For example, let’s say you have two different assets: 

Asset A (Microsoft stock) and Asset B (a rare baseball card). 

A drop in asset A’s price has no impact on the price of asset B when they have a low asset correlation. 

A correlation ratio measures the strength of the relationship between two variables. In general, anything greater than 0.70/-0.70 is a high correlation, something you want to avoid when looking for uncorrelated assets.

When people search for uncorrelated assets, they’re generally looking for investments that are uncorrelated to the stock market.

This relationship between two assets is called a correlation ratio.

However, to understand uncorrelated assets better, you first need to know what correlated assets are:

What Are Correlated Assets?

Correlated assets are the exact opposite of non-correlated assets. 

If the price of asset A drops 10%, any correlated assets will experience similar price movements. For example, if the S&P 500 moves up 1%, the Nasdaq will likely move up too, showing a positive correlation.

It’s important to note that correlation doesn’t only refer to assets that move in the same direction

Prices that move in opposite directions can also be correlated. 

For example, if asset B’s price increases in response to asset A’s price decreasing, they’re still correlated, it’s just called negative correlation.

Why You Should Invest In Uncorrelated Assets

As uncorrelated assets are mostly unaffected by each other, they can shield your investment portfolio from being adversely affected by market volatility and improve your cash flow. 

For example, let’s say asset A and asset B are positively correlated. If the price of asset A falls, so will asset B’s, and if you invested in both, your portfolio would be adversely affected.

However, if assets A and B were uncorrelated, your portfolio won’t be as affected by asset A’s decrease in value since asset B is unlikely to depreciate. 

This way, even though asset A is underperforming, your portfolio should still perform reasonably well due to asset B.

7 Great Uncorrelated Assets To Invest In

By investing in uncorrelated assets, you’re increasing the potential to generate consistent returns while lowering your overall portfolio risk. 

Now that we’ve covered the difference between uncorrelated and correlated assets, let’s take a look at some of the most popular non correlated assets to invest in. 

1. Art

Art is one of those alternative investments historically reserved for an ultra-wealthy investor. It’s proven to be a stable long-term investment as the prices of well-known pieces often appreciate. 

As art is a collectible -  its value depends on a collector’s interest and is mostly unaffected by market trends. Over the last 10 years, art has had a correlation of about 0.135 with the equity market and an equally low or negative correlation with bonds.

An easy way to invest

For investors who don’t have millions to invest in art, there’s Masterworks. The platform offers a unique opportunity to capitalize on art investments with as little as $5,000 by purchasing shares in famous artworks. The platform targets an annual return of between 9% and 15%.

 

2. Cryptocurrency 

Cryptocurrencies like Bitcoin are digital currencies not issued by central organizations like a reserve bank, putting them out of government reach. This subjects them to increased volatility, which can expose the investor to more risk. 

However, with the price of Bitcoin recently surpassing $50,000 for the first time, cryptocurrencies have recorded a low correlation with the stock market of about 0.21 from its peak of 0.50 recorded in October 2020. 

An easy way to invest

For those looking to capitalize on cryptocurrency’s price volatility, there’s eToro, an online social trading platform specializing in cryptocurrencies. 

With a minimum investment of $25, anyone can invest in this asset class. While expected returns will vary, you can see what kind of returns professional traders are targeting and copy those that suit your financial goals. 

 

3. Real estate

Real estate is a popular asset category for many reasons 

Real estate investors benefit from the fact that real estate is resistant to macroeconomic trends and offers stable income through rent payments. However, there’s a ton of due diligence involved, and investments can often involve hidden or unexpected costs.

One of the more affordable and accessible ways of taking advantage of the numerous benefits of real estate investing is by utilizing a real estate investment trust (REIT). A REIT is a company that owns, operates or finances income-generating property. 

They work by pooling investments from many investors, making it far more accessible to everyday retail investors. 

As a benchmark, between January 2010 and December 2019, REITs had a correlation of about 0.65 with the S&P 500

An easy way to invest

Diversyfund is an example of a REIT specializing in multifamily real estate. With a minimum investment of $500, you could expect annualized returns of between 11% - 18%.

 

4. Managed futures

With a futures contract, an investor enters an agreement to purchase a particular asset (such as stocks, bonds, or commodities) at an agreed-upon price at a specified time in the future. 

Managed futures is simply an actively managed portfolio of futures contracts 

Managed futures are a suitable means of portfolio diversification as they provide exposure to several markets, such as commodities, currencies, or agriculture. Due to this exposure, managed futures can mitigate risk in ways that traditional asset classes can’t. 

Additionally, managed futures tend to have a minimal correlation to traditional stocks and bonds. Historically, managed futures have had a low correlation of about 0.10  with the equity market, making managed futures a viable means of diversifying your portfolio.

An easy way to invest

Tradestation is an excellent platform to invest in futures, options, ETF, and more. It’s an ideal platform for investors and traders looking to enhance their skills with zero fees and no minimum investment.

 

5. Gold

Gold has long been seen as an effective means of diversifying. Aside from offering decent returns, gold is also used as a haven against rising interest rates and market volatility due to its  low correlation to the equity market. 

One study found gold has almost zero correlation with stocks, at -0.0475. Gold also has a minimal correlation with investments like real estate. 

An easy way to invest

Buying gold has never been easier with Vaulted

With a minimum investment of just $1 and extremely affordable fees, Vaulted is an excellent platform to invest with. While returns will vary according to the asset’s performance, gold has consistently provided solid returns, rising in value by about 25% throughout 2020.

 

6. Sports memorabilia

Investments in high-end sports memorabilia can be extremely profitable. 

PWCC publishes the Top 100, 500, and 2,500 indices relating to the various grades of vintage sports cards. Since January 2008, the PWCC 100 has returned 392% versus the S&P 500’s 160%. 

However, as it's a relatively new investment class, judging its correlation to the stock market can be challenging. However, as both art and collectibles behave similarly, it's safe to say that it shares a low correlation  with the equity market.

Remember, both art and collectibles derive their value largely from scarcity and a collector’s interest - not from stock market trends.

An easy way to invest

Thanks to Collectable, anyone can invest in sought-after sports memorabilia. You can start purchasing shares in pieces of sporting history with as little as $5. While returns vary, a Patrick Mahomes rookie card sold for $182,000 in 2020, providing returns of 35% in one month.

 

7. Farmland 

Investing in farmland lets you benefit from excellent portfolio diversification and the potential to earn reliable  long-term income. 

Farmland has produced high returns for investors over the last 20 years. Row crop farmland, for example, has consistently returned between 4% and 8% annually for investors. 

In addition to income from rent, farmland also has several unique income sources, such as hunting leases and renewable energy. 

Farmland has an almost zero correlation with the S&P 500, a low correlation of about 0.20 with gold, and a slightly negative correlation with bonds. 

An easy way to invest

Fortunately, you don’t need to buy an entire farm to benefit from farmland investments. With FarmTogether, you can purchase shares and become a partial owner of the land. With a minimum investment of $10,000, investors could earn between 8% and 12% annually. 

 

Final Thoughts

Diversification is an excellent method  of minimizing the overall risk to your investment and ensuring you still have the potential to earn during market fluctuations, all while maintaining your investment objective. 

And the easiest way to achieve a diversified portfolio is by investing in uncorrelated assets. 

While the assets we mentioned here are great options, they’re not the only ones available. 

If you are an accredited investor, many more investments can fall under the uncorrelated asset class, such as investing in private equity, a hedge fund, and in emerging markets. 

And while you should always seek investment advice from a qualified investment advisor, it doesn’t hurt to do your own research beforehand.
If you’re looking for a site to compare various platforms and the different assets they offer, Moneymade is the place to go. With detailed guides highlighting fees, returns, potential risks, and more, Moneymade has the answers to all your investment-related queries!

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