Originally Posted by gcooper
Okay, now I have this nifty chart, how do I use it?
Everyone knows they should diversify across asset classes; stocks, bonds & cash to reduce volatility - but they may not know how/why it works.
Everyone knows that bonds and cash flucuate less than stocks and that's indeed part of it.
However, some may not realize that bonds and cash also don't typically have a high correlation with equities. Stocks often rise and fall inversely as compared to bonds, which also helps reduce volatility.
Anyone with a reasonable asset allocation is taking some advantage of low correlation - they just may not know all the ways that reduces volatility. Correlation is just a numerical comparison between your holdings relative to each other which provides and indication of overall volatility in a portfolio - it's no more mysterious than that. It's not something you MUST be aware of, most people probably aren't.
Beyond that, it can be helpful in choosing among your equity holdings to avoid holdings that are all highly correlated.
Maybe this will help The Benefits of Low Correlation - JOI Articles