Identification

• Correlation describes the tendency for investment returns on different assets to shift together over time. Investments that move together perfectly in tandem are positively correlated. Conversely, negatively correlated assets feature performance patterns that are exact opposites. Investments with no relationship pattern are uncorrelated.
  
  

Misconceptions

• Uncovering perfectly uncorrelated investments is difficult, if not impossible. Stocks, bonds and real estate demonstrate some level of positive correlation. These assets would all lose significant value amid a global financial collapse.
  
  

Features

• Diversified portfolios minimize correlations between investments, so that you could profit across various economic scenarios. For example, technology stocks and Treasury bonds show little correlation to each other. In a recession, your technology stocks might decline while your Treasury bonds held value. Alternatively, both investments might do well as the economy improves.
  
  

Considerations

• Alternative investments increase your portfolio's diversification. Fine art is an alternative investment that could be described as uncorrelated to traditional stocks and bonds.
  
  

Risks

• Diversification exposes you to opportunity cost risk, or missed profits from competing investments. For example, during an economic boom a diversified portfolio of stocks and bonds will underperform a 100 percent stock portfolio.