International Diversification Works (in the Long Run)
Investors and financial economists have long debated the benefits of global equity market diversification. Fans argue that diversifying globally reduces portfolio risk without harming long-term return. Some critics counter with the observation that because markets get more correlated during downturns, most of the diversification occurs on the upside when you do not need it, and vanishes on the downside when you do. Certainly, recent events give support to the critics as all markets have suffered. We argue that this observation, while true, misses the big picture. International diversification might not protect you from terrible days, months, or even years, but over longer horizons (which should be more important to investors) where underlying economic growth matters more to returns than short-lived panics or global coordinated events, it protects you quite well.
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