Easy Money Scanner

Risk & position sizing

How does portfolio correlation fail during systemic high-volatility market crashes?

By Easy Money Scanner · Educational reference · Not investment advice

The short answer

Portfolio correlation measures how assets move relative to each other, but during systemic crashes correlations across most asset classes tend to spike toward 1, meaning diversification benefits can temporarily disappear.

How it works

In calm markets, stocks, bonds, and alternative assets may move independently, but panic selling during crises often drives broad simultaneous declines across previously uncorrelated holdings.

An example

During the March 2020 market crash, both stocks and many bonds fell together as investors liquidated holdings broadly for cash, reducing diversification's usual protective effect.

Risk & limitations

Relying solely on historical correlation data for risk management can understate losses, since correlations are not stable and tend to converge during tail-risk events.

Examples are hypothetical, not trade recommendations. US contract and regulatory references do not automatically apply in Canada. Rules, margin requirements and broker policies can change; confirm them with the relevant authority and your broker.

Sources & further reading