Correlation Crash-Test
Diversification is what your portfolio does in March 2020, not what your fund names look like.
True diversification is about correlation, not count. Two funds with different names that fall together in a crash are one position dressed as two. Nakisa's test is mechanical: pull up the chart of every fund pair through a known stress event (March 2020 is the cleanest recent one) and see whether they crashed together.
If they did, you have not diversified — you have paid two fees for one bet. If one held value or moved opposite, you have a real hedge, and the question becomes whether you actually want a hedge or whether you'd rather take the higher long-term return that comes with accepting volatility.
The test reframes diversification as an empirical property of behaviour during stress, not a marketing claim about asset class.
- Diversification is a property of correlation under stress, not of asset-class labels.
- If two funds fell together in the last crash, they will fall together in the next one.
- Hedges have a return cost — only buy them if you actually need the hedge.
- Younger investors with long horizons often don't need correlation hedges; they need volatility tolerance.
- List all your funds with tickersGet every fund/ETF ticker into one place. The test will not work without explicit identifiers.
- Pull a chart of each pair through March 2020Use any chart tool (Yahoo, Google Finance, Trading 212, portfoliocharts.com). Overlay each pair. The four weeks from late February to late March 2020 are the cleanest recent stress event.Pro tipIf you want a deeper test, also look at September-October 2008 and early 2022.
- Tag each pair as 'fell together' or 'diverged'If both funds dropped >25% together, mark them correlated. If one held value or moved opposite, mark them as a real hedge. Be honest — 'mostly down but less' is still correlated.
- Decide whether you want each hedgeFor correlated pairs, one of them is redundant — drop it. For genuine hedges, ask whether you want to pay the long-run return cost. Young investors with 30-year horizons usually shouldn't.Pro tipDocument the decision so you don't re-litigate it next time a hot fund tempts you.WarningRemoving hedges right before a crash is one of the worst-timed actions in investing — make this decision in calm conditions, not at peak fear.
- Re-run the test annuallyCorrelations change. Bonds and equities famously decoupled in 2022 after decades of negative correlation. Set a calendar reminder to re-run the chart test once a year.
An investor holds a global all-cap fund AND a REIT ETF, believing they are adding property diversification. In March 2020, both fell together because listed REITs trade with equities under stress.
Investors often hold both, believing them distinct. Nakisa points out that plotting their returns shows near-identical lines.
Nakisa repeatedly hears retail investors describe portfolios as diversified because they own many funds, only to discover those funds all fell ~30% together in March 2020. The crash itself was the diagnostic that no spreadsheet had revealed.
The simplicity of the test — open a chart, pick two funds, look at March 2020 — became a teaching device for getting investors to verify rather than assume their diversification.