Investing term

What is Correlation trap?

The phenomenon where assets that look uncorrelated in calm markets all crash together in a crisis.

The correlation trap is the painful tendency for assets that look nicely uncorrelated in calm markets to suddenly crash together in a crisis. Diversification that worked for years can vanish at the exact moment you need it, as panicked investors sell everything at once. It's why true diversification is tested in downturns, not bull markets.

For example

In a 2008-style panic, stocks, real estate, and high-yield bonds all fall together — the diversification that looked solid in good times evaporates.

Correlation trap is taught hands-on in Stage 17 — Portfolio-Level Risk.

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Related terms

60/40 portfolioThe classic balanced portfolio: 60% global equities, 40% investment-grade bonds.Asset mixThe split of the portfolio across asset classes — stocks, bonds, real estate, commodities, cash.Headline noiseThe constant churn of financial news that moves prices intraday but is irrelevant to a multi-decade investor.HedgeAn asset held specifically because it tends to rise (or at least not fall) when something else in the portfolio falls.
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