| Cash | U.S. Taxable IG FI | Municipal FI | HY Taxable FI | DM ex-U.S. FI | EM FI | U.S. LC Equities | U.S. MC Equities | U.S. SC Equities | DM ex-U.S. Equities |
EM Equities | Commodities | Hedge Funds | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash | 1.00 | 0.12 | -0.05 | -0.15 | 0.11 | -0.03 | -0.15 | -0.15 | -0.15 | -0.02 | 0.08 | 0.06 | -0.02 |
| U.S. Taxable IG FI | 1.00 | 0.73 | -0.02 | 0.59 | 0.37 | -0.26 | -0.23 | -0.29 | -0.17 | -0.07 | -0.14 | -0.21 | |
| Municipal FI | 1.00 | 0.29 | 0.42 | 0.55 | 0.01 | 0.06 | -0.05 | 0.10 | 0.20 | 0.06 | 0.12 | ||
| HY Taxable FI | 1.00 | 0.08 | 0.79 | 0.76 | 0.82 | 0.74 | 0.77 | 0.80 | 0.58 | 0.81 | |||
| DM ex-U.S. FI | 1.00 | 0.37 | -0.04 | 0.00 | -0.02 | 0.19 | 0.20 | 0.15 | 0.05 | ||||
| EM FI | 1.00 | 0.56 | 0.61 | 0.52 | 0.61 | 0.72 | 0.44 | 0.62 | |||||
| U.S. LC Equities | 1.00 | 0.96 | 0.91 | 0.88 | 0.78 | 0.46 | 0.85 | ||||||
| U.S. MC Equities | 1.00 | 0.96 | 0.92 | 0.83 | 0.55 | 0.92 | |||||||
| U.S. SC Equities | 1.00 | 0.87 | 0.76 | 0.46 | 0.88 | ||||||||
| DM ex-U.S. Equities | 1.00 | 0.90 | 0.55 | 0.91 | |||||||||
| EM Equities | 1.00 | 0.61 | 0.90 | ||||||||||
| Commodities | 1.00 | 0.67 | |||||||||||
| Hedge Funds | 1.00 |
Risks
Risk considerations
Investing in stocks involves risk and their returns and risk levels can vary depending on prevailing market and economic conditions. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Foreign investing has additional risks including currency, transaction, volatility and political and regulatory uncertainty. These risks are heightened in emerging markets. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High-yield fixed-income securities are considered speculative, involve greater risk of default, and tend to be more volatile than investment-grade fixed-income securities. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes and may be subject to the alternative minimum tax, and legislative and regulatory risk. Investing in commodities is not appropriate for all investors and may subject an investment to greater share price volatility than an investment in traditional equity or debt securities.
Alternative investments, such as hedge funds, are not appropriate for all investors and are only open to “accredited” or “qualified” investors within the meaning of the U.S. securities laws. They are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. While investors may potentially benefit from the ability of alternative investments to potentially improve the risk-reward profiles of their portfolios, the investments themselves can carry significant risks. Hedge funds trade in diverse complex strategies that are affected in different ways and at different times by changing market conditions. Strategies may, at times, be out of market favor for considerable periods which can result in adverse consequences for the investor.
Definitions
Index definitions
Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements.Bloomberg U.S. Treasury Bills (1-3M) Index is representative of money markets.
Bloomberg U.S. Aggregate Bond Index is composed of the Bloomberg U.S. Government/Credit Index and the Bloomberg U.S. Mortgage-Backed Securities Index and includes Treasury issues, agency issues, corporate bond issues, and mortgage-backed securities.
Bloomberg U.S. Corporate High Yield Bond Index covers the U.S. dollar-denominated, non-investment grade, fixed-rate, taxable corporate bond market.
Bloomberg U.S. Municipal Index is considered representative of the broad market for investment-grade, tax-exempt bonds with a maturity of at least one year.
HFRI Fund Weighted Composite Index is a fund-weighted (equal-weighted) index designed to measure the total returns (net of fees) of the approximately 2,000 hedge funds that comprise the Index.
JPMorgan GBI Global ex-U.S. Index (Unhedged) in USD is an unmanaged index market representative of the total return performance in U.S. dollars on an unhedged basis of major non-U.S. bond markets.
JPMorgan EMBI Global Index (USD) is a U.S. dollar-denominated, investible, market cap-weighted index representing a broad universe of emerging market sovereign and quasi-sovereign debt.
MSCI EAFE (DM) and MSCI Emerging Markets (EM) indexes are equity indexes which capture large and mid cap representation across DM countries (excluding Canada and the U.S.) and EM countries around the world.
Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 25% of the total market capitalization of the Russell 1000 Index.
Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.
S&P 500 Index is a market capitalization-weighted index composed of 500 stocks generally considered representative of the U.S. stock market.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
The HFRI indexes are based on information self-reported by hedge fund managers that decide, on their own, at any time, whether or not they want to provide, or continue to provide, information to HFR Asset Management, L.L.C. Results for funds that go out of business are included in the index until the date that they cease operations. Therefore, these indexes may not be complete or accurate representations of the hedge fund universe, and may be biased in several ways.
Source: Wells Fargo Investment Institute. Strategic (long-term) correlation assumptions are as of July 18, 2023 and are based on data from January 1, 2003 to December 31, 2022. For illustrative purposes only. Negative values are shaded in red. Correlation measures the degree to which asset classes move in sync; it does not measure the magnitude of that movement. There is no guarantee that future correlations between the Indexes will remain the same. Index returns do not represent investment performance or the results of actual trading. Index returns reflect general market results, assume the reinvestment of dividends and other distributions and do not reflect deduction for fees, expenses or taxes applicable to an actual investment. Unlike most asset class Indexes, HFR Index returns are net of all fees. Because the HFR Indexes are calculated based on information that is voluntarily provided, actual returns may be lower than those reported. An index is unmanaged and not available for direct investment. Index correlations represent past performance. Past performance is no guarantee of future results. See “Index Definitions and Asset Class Risk Disclosures” link above for risks and index definitions.
Indexes in order represented by Bloomberg U.S. Treasury Bill 1 (–3 Month) Index, Bloomberg U.S. Aggregate Bond Index, Bloomberg U.S. Municipal Index, Bloomberg U.S. Corporate High Yield Bond Index, Bloomberg High Yield Muni Index, JPM GBI Global Ex U.S. Index, JPM EMBI Global Index, S&P 500 Index, Russell Midcap Index, Russell 2000 Index, MSCI EAFE Index, MSCI EM Index, FTSE EPRA/NAREIT Developed Index, Bloomberg Commodity Index, HFRI Fund Weighted Index. IG = investment grade. FI = fixed income. LC = large cap. MC = mid cap. SC = small cap. HY = high yield. DM = developed market. EM = emerging market.
Key Takeaways
- Correlations can play an important role in portfolio diversification. In addition to risk and return, correlations are primary components of portfolio construction.
- Investing in asset classes with low or negative correlation to equities can achieve diversification and reduce overall portfolio risk.