Another great question from the community, this time from our friend Kelly:
“Your website shows the correlation of your strategy to the stock market, but what about the correlations of your strategies to each other?”
All questions are good questions so feel free to ask me anything that’s on your mind, but this one strikes me as particularly awesome. Especially since she went on to elaborate that she’s trying to decide whether to add the Iron Condor strategy or not. I gotta say, that’s exactly why I talk about correlation so much. Building a portfolio using mathematical correlations is in my opinion the only way to do it. Things sometimes sound different and diversified, but unless we actually measure the correlation we won’t know.
So here’s a chart showing all the strategies compared to each other as well as the S&P 500:
So the first thing to notice is, all 5 of them (my 4 strategies and the S&P 500) are all positive. This is to be expected because all of them have performed quite well in the last 5 years so a certain level of positive correlation is normal.
But I’m very proud that none of my strategies are significantly correlated to the S&P 500. We aren’t just bull market investors here. We definitely want to be prepared for the inevitable bear market, and our strategy correlations range from just 19-29% which is very low for two things moving up over the same time period.
But how about to each other? The only one that stands out as having a significant correlation is the VTS Tactical to the VTS Conservative. Since they are both volatility product strategies this is to be expected but I’m actually quite pleased with the 71%. It’s actually very normal and easy to have two volatility strategies showing 90% or higher correlation. Since they are in the same space, 71% is considered reasonably low.
Kelly, now you can see what I was talking about with the Iron Condor Strategy. It actually has the lowest correlations of all of them, making it a great addition to any portfolio. The return is nice no doubt, but it’s really the low correlation that is the most attractive.
And for anyone who wants to learn more about correlations (extremely important for portfolio design) you can check out my dedicated video on the subject.
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