What Is Correlation?
How closely two investments move in relation to each other.
The Full Definition
Correlation measures how closely the price movements of two assets track each other, on a scale from -1 to +1. A correlation of +1 means two assets move in perfect lockstep; -1 means they move in exactly opposite directions; 0 means there's no relationship at all. Diversification only meaningfully reduces risk when you combine assets with low or negative correlation — holding 20 different tech stocks isn't real diversification because they're all highly correlated to the same sector risk.
Real-World Example
US stocks and US bonds have historically had a low or even negative correlation during stock market downturns, which is why a traditional 60/40 portfolio softens the blow of a crash. Two S&P 500 index funds from different providers, on the other hand, have a correlation of nearly +1 — owning both adds no diversification benefit.