Diversifying Across Uncorrelated Stocks — Multi-Angle Investing

For example, if you invest in a bunch of tech stocks that are all highly correlated, a downturn in the tech sector will likely drag your entire portfolio down, regardless of how many different stocks you own.

This is where the concept of multi-angle investing comes in. Instead of just spreading your investments across many stocks, this approach focuses on diversifying across uncorrelated stocks. 

But how exactly does multi-angle investing work, and how can you implement it in your own portfolio? Let’s find out.

What is Multi-Angle Investing?

The core of building a robust portfolio is highly dependent on risk management, which involves investing across diversifying stocks that are not related to each other. Uncorrelated stocks are stocks that don’t move together because they come from different industries, are based in different places, or operate differently entirely.

So, the basic idea of multi-angle investing is that when some of your stocks are underperforming, others will be outperforming, balancing out your portfolio's performance. By investing in stocks that do not move together, you can create a natural hedge against market downturns. 

This minimizes the impact of market volatility, as not all sectors or stocks will react similarly to economic events. For example, while tech stocks might suffer due to regulatory changes, consumer goods stocks might gain on increased demand, balancing your overall portfolio performance.

5 Practical Steps For Diversifying Across Uncorrelated Stocks

Adding a variety of stocks from different sectors to your investment portfolio can create a stronger mix of assets that can be better equipped to handle industry-specific downturns and broader market volatility. 

Here are 5 steps to ensure you choose the right stocks to diversify effectively:

1. Understanding Correlation

Identifying uncorrelated stocks requires a comprehensive understanding of market dynamics and a keen insight into economic indicators. This involves tracking macroeconomic data such as GDP growth rates, unemployment figures, and inflation. Here are a few steps you can follow:

• Track market-specific indicators. You need to look at stock volatility, trading volumes, balance sheets, and profit and loss statements. This helps you compare the performance of different sectors over various time periods (e.g., 1 month, 6 months, 1 year).
• Create a watchlist of ETFs representing different sectors. XLV for healthcare, XLK for technology, and XLU for utilities are great ETF options to monitor and compare their performance and correlation over time.
• Read research reports from financial institutions. J.P. Morgan's "Guide to the Markets" helps you understand the current market environment and which sectors may be uncorrelated.
• Filter stocks within your identified sectors. You can check fundamental criteria like P/E ratio, debt/equity ratio, and ROE. Some common filters include P/E < 20, debt/equity < 1, and ROE > 15% to narrow down to the most attractive stocks.
• Read the latest 10-Q and 10-K reports for the companies on your shortlist. Pay attention to the "Management's Discussion and Analysis" section to understand the company's financial performance, risks, and growth strategies.

2. Portfolio Construction

Fundamental analysis focuses on company metrics like earnings growth, revenue stability, and debt levels, while technical analysis looks at statistical indicators such as moving averages and price momentum. Here’s what you need to look at:

• Choose assets you want to invest in. Compare recent analyst reports and ratings for stocks with a high percentage of "Buy" or "Strong Buy" ratings and consider investing in them.
• Divide your investment capital. For example, invest some amount in different stocks and put some portion into ETFs or bonds you've selected, spread out over several weeks or months.
• Use dollar-cost averaging. Determine how much you want to invest in each stocks, ETFs, or bonds at regular intervals. For example, you can allocate 60% of your investment money to broad market index funds, 15% to healthcare stocks, 15% to technology sectors, and 10% to secure bonds.

You can also focus on companies with sustainable business models and the potential for long-term growth. The goal is to balance your portfolio in a way that the performance of one investment does not overshadow the others. This includes:

• Sector and geographic diversity. Choosing stocks from different sectors and geographic regions helps spread risk and capitalize on global economic growth.
• Asset allocation. Look for the right mix of equities, bonds, real estate, and other assets according to your risk tolerance and investment goals.

3. Regular Monitoring and Rebalancing

You must regularly monitor the correlations as they can change over time due to evolving market conditions. Today's uncorrelated stocks might develop new relationships tomorrow, so a proactive stance in portfolio management can help you adapt to these changes and rebalance periodically quickly.

Here are a few points to consider:

• Use a portfolio tracking tool like Personal Capital or Yahoo Finance Portfolio. This lets you monitor your stock and ETF holdings and also set up alerts for major price movements or news events.
• Schedule quarterly or semi-annual reviews of your portfolio. You can regularly check the sector weightings and correlation of your holdings. If any sector or stock becomes overweight ( > 10% of your portfolio), trim it back to your target allocation and use the proceeds to buy underweighted sectors or stocks.
• Reinvest dividends. Many sector ETFs pay quarterly dividends, and you can choose to have these dividends automatically reinvested into additional shares of the ETF to compound your returns over time and keep your sector allocations in balance.

4. Integrating Comprehensive Risk Management

There are multiple methods for risk management, but going through them all can be a bit confusing. So, here are the primary and easiest ways you can integrate risk management across your investment portfolio:

• Set a stop-loss order. When buying a stock, use a brokerage platform that allows for trailing stop-losses according to your risk tolerance to adjust the order as the stock price moves up.
• Calculate the appropriate position size. Make sure to check this for all stocks based on your portfolio value and risk tolerance. For example, if you have a $100,000 portfolio and want to limit a stock to 5%, invest no more than $5,000 in each position.
• Consider selling covered calls on your stock positions. If you're comfortable with options trading, you can use the "Options" tab on your brokerage platform. This lets you search for call options with strike prices above your purchase price and expiration dates 1-3 months out, which you can use to generate additional income.

5. Expand Analysis to Global Markets

Investing in international markets can offer benefits from growth in different economic cycles. You can turn to emerging markets in Asia, such as India and China, for growth opportunities that differ from those in mature markets like the U.S. and Europe. 

• Research global market opportunities. You can use financial news websites like Bloomberg, CNBC, or The Wall Street Journal to stay informed about global market trends and opportunities.
• Understand the cultural and economic context. Before investing in a foreign market, research the country's regulatory environment, economic conditions, and cultural practices that may impact businesses.
• Analyze specific companies or sectors. Once you've identified a promising market or sector, research specific companies that align with your investment goals and risk tolerance. Pay attention to the company's growth prospects, competitive advantages, and potential risks, just as you would when analyzing domestic stocks.
• Consider currency risks. You also need to understand the potential impact of currency fluctuations on your investment returns. Always monitor exchange rates between your home currency and the currency of the market you're investing in.
• Invest through global ETFs or mutual funds. One of the easiest ways to gain exposure to international markets is through globally-focused ETFs or mutual funds. You can look for funds that track broad global indices like the MSCI World Index or the FTSE All-World Index or funds that focus on specific regions or sectors that interest you.

Final Thoughts

Multi-angle investing is a powerful approach to creating a diversified portfolio that can weather various market conditions. By focusing on uncorrelated stocks from different sectors, geographies, and asset classes, you can minimize the impact of market volatility and potentially enhance your risk-adjusted returns. 

Implementing this strategy effectively requires a systematic approach that includes identifying uncorrelated stocks, constructing a well-balanced portfolio, and regularly monitoring and rebalancing holdings.

While multi-angle investing demands careful research, discipline, and patience, the potential benefits make it a worthwhile endeavor. So, here's to making better investment choices that pave the way to your financial prosperity in 2024 and beyond!