Correlation.
In plain English
Correlation is a number that shows whether two investments tend to move in the same direction, opposite directions, or unrelated. It runs from +1 to -1. A correlation of +1 means they rise and fall together perfectly; -1 means when one goes up the other goes down; and 0 means they move independently. Mixing investments with low or negative correlation is the core idea behind diversification, because they do not all crash at the same time. Two tech stocks usually have high correlation, while stocks and certain bonds often have lower correlation.
01Why it matters
If everything you own is highly correlated, your whole portfolio can drop at once in a bad week, so correlation is what decides whether spreading your money actually protects you.
02The math, step by step
Suppose two large tech stocks have a correlation near +0.9, meaning they almost always move together. Owning both does little to spread your risk. Now pair stocks with bonds that have a correlation near 0. When stocks fall in a rough month, the bonds may hold steady, softening the overall hit to your portfolio.
03What this is NOT
Correlation is NOT cause. Two things moving together does not mean one drives the other. They may simply respond to the same outside force, or it may be coincidence over that period.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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