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Visualizing Asset Class Correlation Over 25 Years (1996-2020)

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This infographic is available as a poster.

Asset Class Correlation

Asset Class

This infographic is available as a poster.

Asset Class Correlation Over 25 Years

How can you minimize the impact of a market crash on your portfolio? One main strategy is building a portfolio with asset classes that have low or negative correlation.

However, the correlation between asset classes can change depending on macroeconomic factors. In this Markets in a Minute from New York Life Investments, we show the correlation of select asset classes and how they have shifted over time.

What is Correlation?

Correlation measures how closely the price movement of two asset classes are related. For example, consider asset class A and B.

  • If asset class A rises 10% and asset class B also rises 10%, they have a perfect positive correlation of 1.
  • If asset class A rises 10% and asset class B doesn’t move at all, they have no correlation.
  • If asset class A drops 10% and asset class B rises 10%, they have a perfect negative correlation of -1.

When investors are building a portfolio, asset classes with negative correlation or no correlation are most desirable. This is because if one asset class drops during a market downturn, the other asset class will either rise or be unaffected.

Correlation Between Stock Categories

Stock categories have historically had some level of positive correlation. Here are the correlations for small and large cap stocks, as well as developed and emerging market stocks.

U.S. Small Cap vs. U.S. Large Cap StocksDeveloped vs. Emerging Market Stocks
19960.640.51
19970.630.76
19980.970.87
19990.580.80
20000.380.74
20010.870.78
20020.730.90
20030.850.75
20040.830.79
20050.930.93
20060.750.93
20070.890.75
20080.960.95
20090.910.88
20100.960.97
20110.970.89
20120.910.89
20130.860.86
20140.750.78
20150.820.76
20160.890.73
20170.390.14
20180.880.73
20190.940.91
20200.930.89
Min0.380.14
Max0.970.97

Rolling 1-year correlations based on monthly returns.

When macroeconomic conditions are strong, the correlation between stock categories tends to be lower as investors focus on individual company prospects. However, when market volatility rises, stocks tend to become more correlated as investors move to safer assets.

This was the case in 1998, when small and large cap stocks reached a peak correlation of 0.97. Russia defaulted on its debt, and a highly-leveraged hedge fund called Long Term Capital Management (LTCM) faced its own defaults as a result. Many banks and pension funds were invested in LTCM, and the Federal Reserve bailed out the fund to avoid a bigger crisis.

Shortly thereafter, small and large cap stock correlation reached a low in 2000. The dotcom bubble initially burst among large cap stocks, impacting some of the world’s largest companies. Small cap stocks didn’t see losses until 2002.

For developed and emerging markets, correlation peaked in 2010 when many countries were recovering from the global financial crisis. On the other end of the scale, correlation plummeted to its lowest level in 2017. One reason is that emerging markets became more distinct from one another due to their varying political risk and sector makeup.

Bonds, Commodities, and Currencies

In contrast to stock categories, there are some asset class pairings that have provided a low or negative correlation. Here is historical correlation data for U.S. stocks and bonds, as well as gold and the U.S. dollar.

U.S. Stocks vs. U.S. BondsGold vs. U.S. Dollar
19960.510.29
19970.68-0.40
1998-0.41-0.19
19990.34-0.36
20000.40-0.44
2001-0.39-0.38
2002-0.72-0.30
2003-0.04-0.43
20040.04-0.65
2005-0.20-0.27
20060.28-0.86
2007-0.44-0.55
20080.34-0.67
20090.64-0.33
2010-0.580.29
2011-0.35-0.59
2012-0.37-0.53
20130.33-0.11
20140.24-0.60
2015-0.26-0.10
2016-0.21-0.58
2017-0.09-0.23
2018-0.26-0.51
2019-0.37-0.51
20200.29-0.43
Min-0.72-0.86
Max0.680.29

Rolling 1-year correlations based on monthly returns.

Stocks and bonds generally have low correlation, with negative correlation in 14 of the last 25 years. Correlation tends to be highest during periods of high inflation expectations. On the flip side, correlation is typically lower during periods of low inflation expectations or high stock market volatility.

These factors contributed to negative correlation in 1998 during the Asian Financial Crisis. Stock prices flattened due to company trade relationships with Asian economies, while bonds benefited from lower rates and lower inflation. In 2002, high market volatility due to the dotcom bubble resulted in stocks and bonds reaching their most negative correlation.

Similarly, gold and the U.S. dollar generally move in opposite directions, with negative correlation in 23 of the last 25 years. When optimism in the U.S. economy is high, the U.S. dollar tends to rise. Conversely, when there are concerns about the U.S. economy or inflation, gold is considered a safe asset that holds its value.

In 2006, gold and the U.S. dollar reached their most negative correlation. As the beginnings of the subprime mortgage crisis appeared, investors piled into safe haven assets such as gold. In 2010, gold and the US dollar had a brief moment of positive correlation. Concerned about the European debt crisis, investors sought safe haven assets elsewhere, including both gold and the U.S. dollar.

Choosing Asset Classes

As investors think about which asset classes to include in their portfolios, it’s important to consider correlation. For instance, stock categories have historically been positively correlated. To diversify, investors may want to consider bonds and alternative assets such as gold.

In addition, macroeconomic events such as financial crises can have an impact on correlation, and investors may want to monitor these changes over time. Finally, considering the risk and return characteristics of various asset classes will allow investors to build a portfolio best suited to their needs.

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Markets in a Minute

The Average American’s Financial Portfolio by Account Type

From retirement plans to bank accounts, we show the percentage of an American’s financial portfolio that is typically held in each account.

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The Average American’s Financial Portfolio by Account Type

Where does the average American put their money? From retirement plans to banks, the typical financial portfolio includes a variety of accounts.

In this graphic from Morningstar, we explore what percentage of a person’s money is typically held within each account.

Breaking Down a Typical Financial Portfolio

People put the most money in employer retirement plans, which make up nearly two-fifths of the average financial portfolio. Bank accounts, which include checking, savings, and CDs, hold the second-largest percentage of people’s money.

Account Type% of Financial Portfolio
Employer retirement plan38%
Bank account23%
Brokerage/investment account14%
Traditional IRA10%
Roth IRA7%
Crypto wallet/account4%
Education savings account3%
Other1%

Source: Morningstar Voice of the Investor Report 2024, based on 1,261 U.S. respondents.

Outside of employer retirement plans and bank accounts, the average American keeps nearly 40% of their money in accounts that advisors typically help manage. For instance, people also hold a large portion of their assets in investment accounts and IRAs.

Three pages with data visualizations that are zoomed out so they arent fully readable along with the text

Account Insight for Advisors

Given the large focus on retirement accounts in financial portfolios, advisors can clearly communicate how they will help investors achieve their retirement goals. Notably, Americans say that funding retirement accounts is a top financial goal in the next three years (39% of people), second only to reducing debt (40%).

Americans also say that building an emergency fund is one of their financial goals (35%), which can be supported by the money they hold in bank accounts. However, it can be helpful for advisors to educate clients on the lower return potential of savings accounts and CDs. In comparison, advisors can highlight that investment or retirement accounts can hold assets with more potential for building wealth, like mutual funds or ETFs. With this knowledge in mind, clients will be better able to balance short-term and long-term financial goals.

The survey results also highlight the importance of advisors staying up to date on emerging trends and products. People hold 4% of their money in crypto accounts on average, and nearly a quarter of people said they hold crypto assets like bitcoin. Advisors who educate themselves on these assets can more effectively answer investors’ questions.

Two pages of data visualization zoomed out so they aren't fully readable, along with the text

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5 Factors Linked to Higher Investor Engagement

Engaged investors review their goals often and are more involved in decisions, but which factors are tied to higher investor engagement?

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Partial bar chart showing the factors linked to higher investor engagement along with a picture of a man looking at a cell phone.

5 Factors Linked to Higher Investor Engagement

Imagine two investors. One investor reviews their investment goals every quarter and actively makes decisions. The second investor hasn’t reviewed their goals in over a year and doesn’t take part in any investment decisions. Are there traits that the first, more involved investor would be more likely to have?

In this graphic from Morningstar, we explore five factors that are associated with high investor engagement.

Influences on Investor Engagement

Morningstar scores their Investor Engagement Index from a low of zero to a high of 100, which indicates full engagement. In their survey, they discovered five traits that are tied to higher average engagement levels among investors.

FactorInvestor Engagement Index Score (Max = 100)
Financial advisor relationshipDon’t work with financial advisor: 63
Work with financial advisor: 70
Sustainability alignmentNo actions/alignment: 63
Some/full alignment: 74
Trust in AILow trust: 61
High trust: 74
Risk toleranceConservative: 62
Aggressive: 76
Comfort making investment decisionsLow comfort: 42
High comfort: 76

Morningstar’s Investor Engagement Index is equally weighted based on retail investors’ responses to seven questions: feeling informed about composition and performance of investments, frequency of investment portfolio review, involvement in investment decision-making, understanding of investment concepts and financial markets, frequency of goals review, clarity of investment strategy aligning to long-term goals, and frequency of engagement in financial education activities.

Three pages with data visualizations that are zoomed out so they arent fully readable along with the text

On average, people who work with financial advisors, have sustainability alignment, trust AI, and have a high risk tolerance are more engaged.

The starkest contrast was that people with high comfort making investment decisions have engagement levels that are nearly two times higher than those with low comfort. In fact, people with a high comfort level were significantly more likely to say they were knowledgeable about the composition and performance of their investments (84%) vs. those with low comfort (18%).

Personalizing Experiences Based on Engagement

Advisors can consider adjusting their approach depending on an investor’s engagement level. For example, if a client has an aggressive risk tolerance this may indicate the client is more engaged. Based on this, the advisor could check if the client would prefer more frequent portfolio reviews.

On the other hand, soft skills can play a key role for those who are less engaged. People with low comfort making investment decisions indicated that the top ways their financial advisor provides value is through optimizing for growth and risk management (62%), making them feel more secure about their financial future (38%), and offering peace of mind and relief from the stress of money management (30%).

Three pages of data visualization zoomed out so they aren't fully readable, along with the text

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