One constant in investing is that markets fluctuate—sometimes rising steadily, other times declining sharply. Fluctuations are inevitable, and these changes pose both opportunity and risk. Some investors may find market timing thrilling; others simply want a more conservative approach and maintain steady growth. For those seeking to manage risk exposure, diversification across asset classes is a common strategy. But not all diversification is equal. A key consideration is whether the assets within a portfolio move in tandem—or independently. This is where non-correlated assets come into play.
What is a non-correlated asset? How do they work? Below, Realized 1031 outlines the basics of non-correlated investments, how they work, and considerations for including them in an investment strategy.
Before we discuss what a non-correlated asset is, let’s first provide context by understanding the idea of correlation in investment and finance. Correlation is the relationship between the movement of two assets. This metric is measured on a scale from -1.0 to +1.0. A correlation of +1.0 means the two assets are perfectly correlated. In other words, they move perfectly in sync. Meanwhile, two assets that have a -1.0 correlation mean that they move in opposite directions. A correlation of 0 means no correlation; in other words, movement is unrelated. In this context, movement refers to the price changes of the assets.
There are variations to the scale, of course. Some assets may have a correlation of +0.8 or +0.5. The closer the value is to 0.0, the more non-correlated the assets are. These investments are ones that have minimal or no statistical relationships with one another. In other words, their price movement is non-correlated to each other. For example, even if stock markets are experiencing volatility, non-correlated assets could behave differently and remain stable. In some cases, they may even increase in value.
Let’s create an example. Your portfolio currently consists of commercial real estate, gold, and the S&P 500, three asset classes with low or no correlation to each other. If the stock market drops 15% in a given year, your real estate investment may hold steady or even grow if the property is in a high-demand area with strong rental income. Gold, too, might rise in value as investors seek a safe haven. Since real estate and gold aren’t strongly tied to the stock market, they are considered non-correlated. This example is for illustrative purposes only and does not predict or represent future performance. All investments involve risk, including loss of principal.
While non-correlated assets do not eliminate risk, they may help reduce overall portfolio volatility by smoothing out returns over time. Their value lies in diversifying sources of return, not in offering protection or certainty.
Modern portfolio theory emphasizes diversification as a tool to manage risk and enhance long-term return potential.. Key concepts include:
Diversifying across asset classes with low correlation may help reduce exposure to unsystematic (or asset-specific) risk. While non-correlated investments do not eliminate risk or guarantee returns, their inclusion may support broader diversification objectives by reducing reliance on a single market segment or economic factor.
All investments carry risk, including the potential loss of principal. Diversification and asset allocation strategies do not ensure a profit or protect against loss in declining markets.
Diversifying a portfolio with non-correlated assets may help reduce exposure to market fluctuations over time. While these investments may not always outperform stocks during bull markets, they can introduce differentiated performance characteristics that may help balance risk when markets become less predictable. Incorporating alternative assets such as real estate, private credit, or infrastructure can support diversification by offering varying risk-return profiles. These assets may also provide additional income opportunities and a degree of inflation sensitivity. However, such benefits are not assured and depend on market conditions and asset selection. For investors focused on long-term objectives—such as retirees or those with moderate risk tolerance—this diversification approach may help manage portfolio volatility across market cycles. However, outcomes are not guaranteed, and each strategy should be evaluated based on individual goals and circumstances.
What are the specific asset classes that are often considered non-correlated? There are several, but keep in mind that the degree of correlation isn’t a set value. The number can shift over time. However, the following have historically shown low correlation within bond markets and traditional equity.
Physical property like residential, commercial, and industrial buildings are generally considered non-correlated assets. The value of these properties is driven by local supply and demand, rental income, and long-term appreciation. While not immune to market cycles, real estate may respond differently than publicly traded equities and can be less sensitive to short-term stock market volatility.
Another asset class that is less affected by market sentiment or corporate earnings is precious metals. Some popular examples are the following.
Gold, in particular, is often viewed as a hedge during periods of market stress. However, precious metals can experience price volatility and may not always move independently of equities. Other precious metals also share this relative stability, especially during inflation or geopolitical instability. Gold, in particular, is often viewed as a hedge during periods of market stress. However, precious metals can experience price volatility and may not always move independently of equities.
Commodities such as oil, natural gas, and agricultural goods are driven by supply-demand dynamics, weather events, and geopolitical developments. These assets often follow different cycles than traditional markets, although they can still be volatile and influenced by macroeconomic trends. Private Equity and Venture Capital
Because private equity and VC investments are not traded on public exchanges, they are typically less exposed to daily market fluctuations. However, their long-term performance can still be influenced by economic conditions, access to capital, and business cycles. These investments also tend to be illiquid and are often limited to accredited investors.
Digital assets such as Bitcoin and Ethereum are decentralized and not tied directly to central bank policy. While sometimes viewed as alternatives to traditional markets, cryptocurrencies have exhibited periods of both high and low correlation with equities and are generally characterized by high volatility and speculative risk.
There is more to choosing non-correlated investments than just looking at how certain assets behave. You’ll need careful evaluation of how the asset performed historically relative to each other and in different market environments.. Plus, an understanding of how correlations can change over time.
Correlation coefficients—available through financial data providers and research platforms—can offer insights into how an asset’s returns have historically related to equities or bonds. As mentioned, a 0.0 indicates low to no correlation, though these figures are not static and may vary under different market conditions.. One place to access this type of data is advisory services or financial research platforms.
Independent value drivers are factors that affect the asset’s performance unrelated to the equity market. For example, as we described above, it may be influenced by factors like regional demand or interest rates, rather than daily movements in equity markets. However, all asset classes can still be influenced by broader economic trends.
Working with qualified financial professionals may help you align with their goals, time horizons, and risk tolerance.. Advisors may also provide access to tools or platforms that support due diligence on alternative and non-traditional assets.
There is no universally optimal time to incorporate non-correlated assets into a portfolio. However, investors may choose to evaluate these options under certain conditions where diversification or reduced market sensitivity is a priority. The decision should be aligned with your broader investment objectives, time horizon, and risk tolerance.
Some investors reallocate a portion of appreciated equity holdings into less correlated assets during strong markets. This strategy may help reduce concentration risk and rebalance the portfolio across asset classes with differing risk-return profiles.
Major milestones—such as retirement, education funding, or large purchases—can prompt investors to reassess risk exposure. In some cases, reducing reliance on more volatile assets by incorporating non-correlated investments may support planning for near- or mid-term liquidity needs.
Geopolitical tensions, rising interest rates, or inflationary environments often spur demand for real assets like gold or real estate. Non-correlated investments can act as a hedge while helping you maintain independence from broader market swings.
It’s common for investors to conflate non-correlated and negatively correlated assets, but they serve distinct roles in portfolio construction. Non-correlated assets do not consistently align with broader indices, which can make them useful in diversification strategies.
Meanwhile, negatively correlated assets are ones that have an inverse relationship with each other. A well-known example is the historical inverse relationship between stocks and long-term U.S. Treasury bonds—bonds have often rallied during periods of equity market stress.
Both types of assets can contribute to diversification, though their behavior will vary depending on market conditions. Neither offers guaranteed protection, and their effectiveness in managing risk depends on broader portfolio composition and investor goals.
A 1031 exchange is a tax-deferral strategy that investors may use to exchange one investment property for another of like-kind. Named after Section 1031 of the Revenue Code, this strategy allows taxpayers to defer recognition of capital gains, preserving more capital for reinvestment.
To qualify for deferral, the IRS requires that several conditions be met including:
Because only real estate qualifies under Section 1031, non-correlated assets must fall within the real estate category—such as properties in different sectors or geographic markets. For example, an investor might exchange a commercial property for a residential one to gain exposure to a different market segment. While all real estate carries risk, these assets may behave differently from one another, contributing to portfolio diversification.
You can even enter through a Delaware Statutory Trust (DST). DSTs can offer:
DSTs are illiquid investments and not suitable for all investors. They offer no guarantees of income or appreciation, and investors have no control over property decisions once invested. DSTs are subject to market risk, property-specific risk, and sponsor risk. Distributions are not guaranteed and may fluctuate. Changes in tax law could also impact the viability of 1031 exchange treatment.
In portfolio construction, we can take a look at how assets interact with each other. Non-correlated investments—those with a correlation coefficient close to zero—may help reduce overall portfolio volatility because their performance is typically influenced by factors independent of traditional stock or bond markets.
While non-correlated assets do not guarantee stability or protection from loss, they are often used as part of a diversification strategy to manage risk across different market environments. Examples may include real estate, commodities, or private assets that respond to different economic drivers.
It’s important to remember that correlation does not imply causation, and past correlation patterns may not continue in the future. Diversification strategies, including the use of non-correlated assets, do not guarantee a profit or protect against losses in declining markets.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
Sources:
https://insights.masterworks.com/alternative-investments/what-are-non-correlated-assets/
https://www.investopedia.com/terms/e/efficientfrontier.asp