Uncorrelated Assets Explained: the Low-Risk, High-Reward Portfolio Unicorns

It's game six of the NBA finals in 1998, and the Chicago Bulls are down against the Utah Jazz 85-86. With 5.2 seconds on the clock, Michael Jordan comes up onto his toes and shoots the ball. As it swooshes through the net, he hovers on the balls of his feet, right arm stretched above in that classic shooting pose for an extra long second—as if he knew that final shot would be the exact moment in which the Bulls went from 90s legends to legendary dumpster fire.

After winning six NBA Championships in a decade and courting a never-ending roster of legends—from Michael Jordan to Scottie Pippen to Dennis Rodman—the Chicago Bulls franchise came crashing down right after Jordan's "last shot." The next season, the team finished with the worst record in their conference. The next few years were similarly dismal, and they never did make it back to dream team status.

The stock market has been on its own "bull run" for the last decade, and many investors are starting to prepare for the inevitable crash. The market has been on the rise since 2009, meaning we're currently in the longest bull run (a period of increasing stock market value) in history. Plus, uncertainty surrounding COVID-19 continues to test the strength of the market's current winning streak.

If the market takes a 1999-Bulls-style nosedive, there's one thing you'll want to invest in to keep your portfolio from crashing too: uncorrelated assets.

An uncorrelated asset is, as its name suggests, an asset that isn't correlated with stocks. This means that its value doesn't follow the same ups and downs as the stock market. Many investors consider them central to any good diversification strategy for that reason—the market could crash tomorrow, and uncorrelated assets are likely to continue holding their value regardless. 

Examples of uncorrelated assets include bonds, real estate, gold, farmland, and fine art. Studies have shown that allocating 10% to 20% of your portfolio to these uncorrelated assets produces a significant reduction in risk.

Sometimes these assets are even negatively correlated with the stock market, which means they tend to do the opposite of whatever stocks are doing. When the stock market falls, they increase in value, helping to counter your losses even more. 

Treasury bonds (T-bonds), for example, are negatively correlated with stocks. In the spring of 2020, the stock market fell 33.9% while Treasury bonds spiked. If you had money in both, the returns you'd see from Treasury bonds would help offset any losses from the stock market.

However, Treasury bonds still don't provide a lot in terms of returns. In 2020, for example, they averaged about 1% to the stock market's almost 18%. This is the downside of a lot of uncorrelated—and especially negatively correlated—assets: they lower both your risk and your returns. Investors are often willing to settle for assets that don't perform as well as the stock market in order to preserve the wealth they already have. But if you have too many low-earning assets in your portfolio, it weighs down your long-term growth enough to prevent you from building more wealth.

This is where alternative assets, such as real estate, art, and farmland, come into play. Many of these assets perform just as well as the stock market if not better. At the same time, they don't usually track the same patterns as the stock market, so they lower your risk without killing your returns. Here are some popular uncorrelated assets, how they perform in relation to stocks, and how you can start investing in them.