Investing is Not Monopoly & the Low Correlation Superhero

Investing is like dieting: you don’t gain weight just by looking at pizza, and you don’t lose it by dreaming about kale. Yet, when it comes to investments, clients often behave as if a single dip or rise in the market is a life-altering event. “I lost money this month!” they exclaim, or, “I made money this month!” Reality check: stock prices are not Monopoly money you cash in every time the dice rolls in your favor.

Here’s the truth: market prices aren’t realized gains or losses. They’re appraisals—fancy market guesses about what your assets are worth if you sold them today. So, let’s break down why I believe these mental accounting gymnastics are not only wrong but could also be the reason your financial life feels like an endless loop of “Go Directly to Jail” cards.

Stock Prices: Zillow for Your Investments

Think of stock prices like Zillow’s estimates for your house. They’re an appraisal, not a finalized check in your mailbox. You wouldn’t say, “I lost $100K today because the neighbor sold their house for less.” You’d roll your eyes at the market and move on. Similarly, just because your portfolio dropped 5% doesn’t mean your future yacht is now a dinghy. You haven’t lost money until you sell.

Why does this distinction matter? Because obsessing over every tick of the market turns your long-term financial strategy into a melodrama that even soap operas would envy.

Why Do We Fall for This Trap?

It’s called loss aversion, or as I like to call it, “financial hypochondria.” People feel the pain of a 10% loss way more than the joy of a 10% gain. For example:

• If your portfolio loses $50,000, you’re in a fighting mood, you know you have typed that email to your advisor ten times already.
• If it gains $50,000, you shrug, maybe buy a fancier latte, and move on, totally ignoring it.

The human brain is wired to overreact to perceived losses, and when you pair that with a constant stream of market updates, it’s no wonder people feel like they’re on an emotional rollercoaster.  Recently, I heard some sage wisdom from a financial advisor, Tony Fiorillo, Managing Partner of Asset Mgmt. Strategies Inc., “Brad do you fear your scissors and knives in your drawer?

Me: “No I don’t…”

Tony: “Why not, don’t you know they are sharp?”

Me: “Yes, but I don’t touch, use or even look at them everyday.”

Tony: “Good way to treat stock market news.”

I thought that is brilliant, you know who said something VERY similar? Warrant Buffet, he said “…ignore the stock market, it does not even exist.”

Low Correlation to the Rescue: The Superhero of Risk Management

Want to sleep better at night while ignoring those dramatic market swings? Enter low-correlation assets—investments that don’t all move in the same direction at the same time. Think of them as the peanut butter to your portfolio’s jelly.

When stocks zig, the old adage was bonds often zag, (maybe not anymore see article: Bonds don’t belong) creating balance and reducing your portfolio’s volatility. It’s like hiring a team of superheroes instead of relying on 1 caped crusader—because let’s face it, Batman can’t fix everything.

By combining assets that don’t move in lockstep, fiduciaries (your financial advisors) can create a portfolio that helps to weather market conditions, reducing overall risk while preserving growth potential.

Here’s why ignoring correlation is a catastrophic mistake:

1. Failure to Protect Against Systemic Risk:
   During a market crash, many asset classes with low volatility (like certain bonds) may still move in the same direction as equities. Without uncorrelated assets, such as commodities or alternative investments, the entire portfolio can sink together. Fiduciaries who fail to consider correlation risk leaving clients unprepared for systemic events.
2. Missed Opportunities for Growth and Resilience:
   Low-correlation portfolios thrive on diversification. For example, pairing equities with assets like real estate, international stocks, or inflation-protected securities have the potential to reduce volatility without capping gains. This approach help to ensure that no single market event derails the client’s financial plan.
3. Behavioral Challenges Amplified:
   When fiduciaries ignore correlation and overweight low-volatility or buffered products, they unintentionally reinforce clients’ short-term thinking. Clients may feel safe but become disillusioned when they realize their portfolios are underperforming their peers. This increases the risk of panic-driven decisions, like abandoning the advisor altogether.

Financial Advisors Wake UP!

The Hidden Danger of Ignoring Correlation: Why Overweighting Low-Volatility or Buffered Products Is a Fiduciary Risk

Imagine building a fortress for your client’s financial future and forgetting to include doors. I believe that’s what happens when fiduciaries prioritize low-volatility or buffered products at the expense of low-correlation investments. These products may seem like the “safe” choice, but focusing too heavily on them has the potential to leave portfolios vulnerable to the very risks fiduciaries are sworn to mitigate. In this essay, let’s expose the dangers of this misguided behavior and scare some sense into advisors who undervalue the power of correlation.

• Your Reputation on the Line: Clients start comparing their underperforming portfolios to their neighbors’ diversified investments. Trust erodes, and your practice suffers irreversible damage.

Now imagine the alternative: you prioritize low-correlation investments. During downturns, your clients see the benefits of diversification as one asset class cushions the blow from another. Their portfolios grow steadily, and they trust you more for helping them stay on track.

Conclusion: The Fiduciary Imperative

Fiduciaries have a duty to act in their clients’ best interest—not their emotions. Overweighting low-volatility or buffered products is a short-term bandage that risks long-term harm. Instead, embrace the power of low correlation. Diversify thoughtfully, reduce systemic risk, and help to ensure clients’ portfolios can weather any storm while still reaching their financial goals.

Focusing on correlation isn’t just good advice in my opinion—it’s your professional responsibility. Clients:  Don’t be with an advisor who drives the car off the road because you were too focused on smoothing the bumps. Instead, build a vehicle that’s ready for the journey, no matter the terrain, low correlation to the rescue, ask for it!