MARKETS Markets · February 2026 · ~5 min

The illusion of correlation: why assets crash together

"Don't put all your eggs in one basket" is sound advice — with a premise that's often forgotten: the baskets must be genuinely independent. Assets that look unrelated in calm times often fall hand in hand once a crisis hits.

Correlation races toward 1

Diversification relies on low correlation. But correlation is not a constant; it shifts with the environment. When markets are under stress, deleveraging begins and liquidity dries up everywhere at once, nearly all risk assets move in the same direction — statisticians call it "correlation tending to 1." The hedge you thought you held becomes a copy of the same bet.

You thought you owned ten assets; in a crisis you discover you owned only one — risk appetite.

Why it happens

• Shared money: the same leveraged capital holds different assets and, when forced to liquidate, sells them all;
• Shared liquidity: in a dash for cash, people sell what they can, not what they should;
• Shared narrative: the mood shift is global, indifferent to sectors.

Real diversification comes from spreading across drivers, not from piling up tickers.