65-Day Academy · Day 44 · Building a Portfolio
Correlation in Crises — the Fine Print
The breakdown
In calm markets, stocks/bonds/gold correlations are low and stable. In crises (2008, March 2020), correlations spike toward 1: investors sell WHATEVER has liquidity to raise cash. Even gold fell 12% in March 2020. Diversification's protection weakens exactly when you need it most — plan for the crisis correlation, not the average one.
What still works in crises
Three things held up across crises: cash (dry powder + no forced selling), true safe-haven duration (long Treasuries in deflationary crises — though not in inflationary ones, 2022 showed), and LOW LEVERAGE (the unforced seller buys the panic). The deepest diversification is against your own behavior: sizing that lets you hold, and cash that lets you buy.
What you'll practise
True or false: a diversified portfolio cannot have a bad year.
10 XP in the app · introductory
Sources
- Correlation & Market CrisesInvestopedia
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All lessons are for educational purposes only and are not individualized financial advice, a recommendation, or a solicitation to buy or sell any security. Options involve substantial risk and are not suitable for every investor.