Are your children related? Are they correlated?

If one of your children learns to ride a bike at age 6, will your other child also learn to ride a bike at age 6? Doubtful.

If one of your children receives an A in 8th grade English, will your other children also receive an A in that class? Probably not.

In real life it is most unusual for your children to have similar experiences. One likes spaghetti, the other, not so much. It is so normal that they will be different that we are amazed when they actually have something in common. Wow, did they both say they liked that vacation? Children in a family are typically much uncorrelated. When they appear correlated, liking the same thing, we are astounded. In the investment world sometimes we witness different types of investments as behaving the same. We don't use the word related, we use the statistical term "correlated".

We spend time making sure that each portfolio we build includes investments that are different. We cultivate differences on purpose. Much like children, we cherish each one for its own unique qualities. The fruit of this labor is our clients end up with a diversified portfolio. Only on rare instances do we expect the investments to take similar routes. Like parents amazed at their children's abilities we too are often surprised by the different experiences of the investments we choose. The words "never would have thought," cross our lips on occasion. The true benefit of choosing uncorrelated investments is that rarely will all of them move up or down in unison. This minimizes the chance that all our children will fall off their bikes at the same time, if you will.

The investment markets can become overly correlated at times. In the last several weeks we have witnessed one of these episodes. It is fairly rare and when it occurs it doesn't typically last long. It sounds like this when it is happening: US Stocks go down because Bonds are going down, and since US Stocks are going down International Stocks go down, and since International Stocks are going down, precious metals go down. This can happen on both the going up side and the going down side of the investment world. We have witnessed many different investment types going up at the same time for short periods during 2012. Simply, it means one thing affects or depends on another more than it should. Often times the best practice in these situations is to not over react. Let a little time pass and investments will self-correct towards more uncorrelated paths. Like dealing with children who surprise you when they like the same thing; or before you react to the phenomenon of buying cases of spaghetti; give it some time. Their opinions will likely differ.