Asset correlation tool: how your stocks and ETFs move

Written by the Tactfolio research teamPublished 4 min read

Correlation shows how two investments move together. This asset correlation tool loads real past prices for up to 8 US stocks or ETFs. It shows how closely each pair moved, month by month, as a grid of numbers from -1 to +1. It needs a free account, because it uses our price data.

  • +1 means two assets always moved together. 0 means they had no link. -1 means they always moved in opposite ways.
  • Assets with a low correlation can smooth out a portfolio. When one falls, the other may not.
  • Correlations change over time. They often rise in a crash, when you want them low.
  • The tool uses total returns, so dividends count, and full months only.
  • It shows the past. It does not predict how assets will move next.

How to use the asset correlation tool#

Type 2 to 8 tickers, separated by commas, and pick a period. Then press Calculate. The grid shows the correlation of every pair. Each ticker also gets its own average yearly return and volatility.

The tool lines up the months that every ticker has. So a young fund shortens the period for all of them. The line above the grid says which months it used.

The starting tickers are examples. They are not advice.

How is correlation worked out?#

The tool takes each ticker’s return for every month. Then it compares how far each month landed from that ticker’s own average.

for each month:
  gap A = return of A - average return of A
  gap B = return of B - average return of B
correlation = sum of (gap A × gap B) ÷ √(sum of gap A² × sum of gap B²)

When both gaps tend to have the same sign, the result is close to +1. When the signs tend to differ, it is close to -1. When there is no pattern, it is close to 0. This is called the Pearson correlation.

A worked example#

Say fund A and fund B had these returns over 5 months.

MonthFund AFund B
12%1%
2-1%-2%
33%2%
40%1%
51%0%
  1. Fund A averaged 1% a month. Its gaps were 1, -2, 2, -1 and 0.
  2. Fund B averaged 0.4% a month. Its gaps were 0.6, -2.4, 1.6, 0.6 and -0.4.
  3. Multiply the gaps month by month and add them up. That gives 8.
  4. The squared gaps add up to 10 for A and 9.2 for B.
  5. The correlation is 8 ÷ √(10 × 9.2) = 8 ÷ 9.59, or about 0.83.

So the two funds moved together most of the time. Holding both would not spread your risk much. Real tools use many more months, because 5 months is far too few to trust.

How to read the grid#

  • 0.7 to 1. The two moved together closely. Two US stock funds often land here.
  • 0.3 to 0.7. They moved together some of the time.
  • -0.3 to 0.3. There was little link. This is where diversification helps most.
  • Below -0.3. They tended to move in opposite ways. This is rare over long periods.

Each cell on the line from top left to bottom right is a ticker with itself, so it is always 1.

Common mistakes with correlation#

  • Trusting a short period. A few years can show a link that later goes away. Try a longer period too.
  • Expecting it to hold in a crash. In a panic, many assets fall at once.
  • Mixing up correlation and size. Two assets can have a correlation of 1 while one moves twice as far.
  • Reading it as cause. A high correlation does not mean one asset moves the other.

Try it on Tactfolio#

Correlation tells you which assets might balance each other. The efficient frontier tool uses the same numbers to find the mixes with the least risk for each return. The portfolio optimizer picks one mix for a goal you choose. To test a mix with real trades and rebalancing, use the Tactfolio strategy builder. Risk parity is one way to weight assets by their risk. Why past results mislead explains what no test can tell you. Every tool is on the free trading calculators page.

Common questions#

What is a good correlation for diversification?#

Lower is better for spreading risk. Pairs below about 0.3 add the most balance. A pair near 1 adds very little, even if the two names look different.

Why do I need an account for this tool?#

The tool loads years of real daily prices for each ticker. That data is part of Tactfolio, so it needs a free account. The other calculators on this site work with no sign-up.

Why are daily and monthly correlations different?#

Daily returns include a lot of noise. Monthly returns smooth some of it out. This tool uses monthly returns, which suit people who hold for months or years.

Do stocks and bonds always move in opposite ways?#

No. US stocks and Treasury bonds often had a low or negative correlation in the 2000s and 2010s. In 2022 both fell together, as interest rates rose fast. That is why it helps to check more than one period.

Can I use this tool for crypto?#

This tool loads US stocks and ETFs. Tactfolio supports crypto for backtest and paper or testnet only. Real-money crypto trading is not available.

Sources

Understand the numbers