In Search of Imperfect Correlation

Chart of the Week for August 13-19, 1999

Correlation measures the extent to which the returns of two asset classes are related. A correlation of 1.0 (perfect positiv correlation) means that the asset lasses move in perfect tandem; when one has a positive return, so does the other. A correlation of -1.0 (perfect negative correlation) means that when one asset class has a negative return, the other has a positive return. In theory, an investor would want to hold a portfolio of assets that are negatively correlated to reduce the risk of loss. Sadly, asset classes with perfect negative correlation only exist in theory. Still, investors can reduce risk by selecting asset classes that are less than perfectly correlated.

An interesting aspect of correlations is that they change over time, as the chart above illustrates. Patterns of stock and bond returns were more similar two years ago, but have become more disparate due to equity market volatility and changes in interest rates. Note, however, that because stock/bond correlation is never a perfect 1.0, there is clearly a diversification benefit to holding each in a portfolio.

* This information is being provided for educational purposes and is not intended to be construed as or relied upon as investment advice. ICMA-RC does not offer specific tax or legal advice. Individuals are advised to consider any new investment strategies carefully prior to implementing. Past performance does not guarantee future results. Investment returns and principal value will fluctuate, so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data illustrated. For performance data current to the most recent month end, contact ICMA-RC Services, LLC by calling 1-800-669-7400 or by writing to 777 North Capitol Street, NE, Washington, DC 20002-4240, or by visiting www.icmarc.org. Please consult both the current Vantagepoint Funds prospectus and MAKING SOUND INVESTMENT DECISIONS: A Retirement Investment Guide carefully for a complete summary of all fees, expenses, charges, financial highlights and investment objectives, risks and performance information prior to investing any money. Vantagepoint securities are distributed by ICMA-RC Services LLC, a broker dealer affiliate of ICMA-RC, member NASD/SIPC. For a current prospectus, contact ICMA-RC Services LLC, 777 North Capitol Street NE, Washington, DC 20002-4240. 1-800-669-7400.