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The market behavior lately has been making me think a lot about a potential bubble formation in the years ahead...Now before you panic, I will be the first to tell you, a bubble is not something that happens overnight. These things take time, but beware, they always come
In the spirit of helping other #fintwit colleagues, I wanted to share a simple tool I use which might be helpful to gage how risky your investment portfolio is. Please remember, you only truly know your risk tolerance during the BAD times NOT during the GOOD times (now).
The tool i'm talking about is the correlation calculator for stocks. For those unfamiliar with what correlation is, can check this site:https://smartasset.com/investing/stock-correlation
Here's the calculator from MacroAxis:https://www.macroaxis.com/invest/marketCorrelation?s=FSLY,SDGR,ADS,NGA&ot=table&mode=i
You can input your own stock portfolio and it will give you the correlation between them. The closer the number is to 1, the higher the likelihood of your stocks behaving similarly. A negative number close to -1, shows a negative correlation.
Why this is important is because I'm noticing a lot of new investors....and some older ones... which are long many technology driven stocks and thinking they're well diversified, which is not always the case. Having a Barbell strategy could be a savior for 2021 in my opinion
Here's an example of a group of names that are quite popular on #fintwit I put together to show what I mean:$SQ $CRWD $FSLY $DOCU $ZOOM $TDOC $PTON
https://www.macroaxis.com/invest/marketCorrelation?s=SQ,CRWD,FSLY,DOCU,ZOOM,TDOC,PTON&ot=table&mode=i
As you can see, these have quite the high correlation meaning they will most likely drop in tandem and vice versa.
The point here I'm trying to make is if you want TRUE diversification, you need to have a portfolio with low to negative correlation between your stocks in order to avoid seeing your portfolio behave similarly during the good times(now) and more importantly the bad times.
Remember this is only ONE tool I picked out in order to show you how Portfolio Risk has to be part of your process if you're serious about being a long term successful investor. Every successful investor has a process and if you don't ,it will show at the worst possible time.
Pls feel free to RT and share with whomever you believe might find this information useful. Main reason for this Thread is to make you think about having a process, sticking to it and protecting your portfolio to be able to sustain the bad times, when they do come around
