Going Against The Grain

In general, investors look for low correlation as a safety blanket whenever the market is moving down. For example, from the beginning of 1979 through the first quarter of 2007, real estate investment trusts (REITs) had low correlations to stocks in up markets but much higher correlations in down markets.

Investors looking for diversification benefits as well as cash flow might do better with high-yield bonds, which have been more correlated in up markets and less correlated in down markets.

Judging from the results of the past 30 years, government and corporate bonds are appealing for their lack of correlation in down markets - so they may produce positive returns when stocks sink.

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