Investing term
What is Correlation?
How tightly two investments tend to move together, measured from +1 (identical moves) to −1 (opposite moves).
Correlation measures how tightly two investments move together, on a scale from +1 (they move identically) through 0 (no relationship) to −1 (they move exactly opposite). It's the maths behind diversification: combining assets with low or negative correlation smooths the overall ride, because they rarely fall at the same time.
The practical goal isn't to own many things — it's to own things that behave differently. Two tech stocks might be highly correlated (near +1) and offer little diversification together, while stocks and government bonds are often weakly correlated, so one can cushion the other. The catch is that correlations aren't fixed: in a severe crisis, many assets can fall together as everyone rushes for cash.
Correlation runs from +1 (identical moves) through 0 to −1 (opposite). Diversification comes from combining low-correlation assets — though correlations can spike toward +1 in a crisis.
For example
Stocks and government bonds often have low correlation — in a stock crash bonds may hold or rise, which is exactly why owning both steadies a portfolio.
Learn it by doing
That's Correlation in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 4, Stocks, Bonds, Cash & Alternatives).
Try the free lesson →Why it matters to you
Correlation matters because it's what makes diversification actually work — or fail. Adding a holding only reduces risk if it doesn't move in step with what you already own; piling up correlated assets just concentrates the same bet under different names. Watching correlation, not just count, is how you build a portfolio that genuinely spreads risk — while remembering that in a panic, correlations can spike toward 1 and the protection thins out.
⚠ Assuming diversification holds in a crisis
Correlations aren't constant. In a normal market, assets that usually move independently provide real diversification — but in a severe panic, investors sell everything at once, and correlations can jump toward +1. Counting on low correlation to protect you exactly when you need it most can disappoint, which is why cash and quality bonds still matter.