A study by three Yale professors has examined international stock market correlations over the past 150 years and found that diversification opportunities among major markets such as the U.S., the United Kingdom, Germany, and France have reached a 150-year low. Even during the Great Depression of the 1930s, when correlations previously peaked, these markets provided greater opportunities for risk spreading than they do today.
Nevertheless, the authors found diversification benefits from the increasing number of world markets available to the investor. Thus, a foreign investment strategy that focuses heavily on European equities may not provide as much risk reduction as one that includes companies based all over the world, including emerging markets.
Another study in the 1990s indicated greater benefits among small companies than large companies, for international diversification. A sophisticated asset allocation, then, might include an emerging markets funds, a small-company foreign fund, and perhaps a foreign bond fund in addition to a fund that holds large companies based in industrialized foreign countries.
