Many people interested in real estate are also interested in other types of investments. It makes sense to have a diversified portfolio, but in volatile times, what should you invest in? Matthew Hall, a financial planner and portfolio manager, suggests that the key to investing during times of volatility is to pick assets that are negatively correlated.

In a recent presentation, Hall demonstrated slight negative correlations between the U.S., Canadian, and European stock markets and the Teranet National Bank house price index, seasonally adjusted. Essentially, this means that there is a diversification benefit from having stocks as well as real estate in your portfolio.

The short answer to what you should invest in is both real estate and stocks, if possible. Most people own their homes, which gives them a local real estate play. However, owning stocks in large companies in the US, for example, would have a reasonably low correlation with your principal residence or even rental real estate in Ottawa.

It's interesting to note that even the Canadian market is somewhat negatively correlated, although not as strongly as the US. Neither is close to a negative one, but they are negative enough to add a diversification benefit to anyone's total wealth. Ultimately, if you own both stocks and real estate, it's a safeguard against market crashes.

In a financial panic, all assets will typically correlate positively, meaning everything will move in the same direction for a short period of time. Once the volatility subsides, what's going to move and in what direction? That's where having negative correlations is valuable.

Stock markets are forward-looking, and everyone's consensus view about what's going to happen affects them. Thus, you're seeing a lot of volatility in the market this year, particularly because stocks don't do too well if interest rates go up. Although the movement is not the same as real estate, the two are similar in the sense that large companies also borrow to invest in their businesses. If borrowing rates go up, those projects become less profitable and have a depressive effect on the stock price.

The main differences between real estate investing and financial investing typically have to do with the income that's earned. In Canada, dividends paid by Canadian companies have a substantial tax advantage over other types of passive income that you can earn. Additionally, financial assets can be held in tax-deferred and tax-sheltered accounts, such as RRSPs and TFSAs, where direct real estate ownership cannot be held.

The capital gains on both real estate and financial investments are preferentially taxed. In Canada, the capital gain on your principal residence is even better than that of a stock asset, as no one pays tax on their principal residence through the principal residence exemption. However, if it's an investment property, it's taxed as a capital gain, just like a capital gain on a stock. The difference lies in the treatment of income. A Canadian dividend from a Canadian company is grossed up, and a tax credit is applied to it. Income from rents is taxed as ordinary income, with no tax credit or gross up.

In conclusion, having both real estate and stocks in your portfolio is the best safeguard against market crashes. Understanding the differences between real estate investing and financial investing, particularly in terms of taxation, is also essential. Diversification is the key to success in investing, and having a well-diversified portfolio can help protect your wealth.