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Investing can take many forms, and an investment plan often changes throughout your financial journey. But one of the core principles of building a portfolio remains, regardless of your investment strategy’s time horizon, risk profile, or goal.
Diversification can help smooth out investment returns over time by allocating assets that react differently to the same market or economic events.
Stocks and bonds are usually uncorrelated to each other, which means that when stocks perform well, bonds usually struggle, and vice-versa. The relationship is related to risk. In environments when risk is heightened, investors often flee stocks for the relative safety of bonds.
However, there are periods in which market or economic conditions result in stocks and bonds performing in tandem. This is called positive correlation. When volatility, geopolitical uncertainty, spiking inflation, or rising interest rates are the dominant factors in the market and economic landscape, it can give rise to conditions in which... ...
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