Real Estate to Gold Ratio

Interpretation

The chart above displays the 1-year rolling correlation coefficient between the Case-Shiller Home Price Index and the price of gold. A correlation coefficient of +1 indicates a perfect positive correlation, meaning that home prices and the gold moved in the same direction during the specified time window. Conversely, a correlation coefficient of -1 indicates that they moved in opposite directions. There are periods during which the price on gold did not change, which results in a standard deviation of zero and a correlation plus or minus infinity. These periods are removed from the data set and appear as gaps in the rolling correlation series.
Diversification is the practice of spreading investments across different assets to reduce risk. In his book Principles, Ray Dalio called diversification the “Holy Grail of Investing”. He realized that with fifteen to twenty uncorrelated return streams, he could dramatically reduce the risks without reducing the expected returns.