Does International-Stock Diversification Still Work?
Correlations have trended up, but there's still a long-term argument for international diversification.
Adding international exposure is one of the first steps toward a diversified portfolio. Even minimalist investors usually carve out a portion of their portfolios for non-U.S. stocks after adding exposure to domestic stocks and bonds. International stocks are subject to myriad factors that can lead to divergent performance, including local market conditions, currency movements, exposure to different sectors and industries, and political and economic factors. These traits mean they often show different performance patterns--both relative to the U.S. market and versus other international markets.
However, in our recent examination of asset-class correlations, the "2021 Diversification Landscape," we found that the benefits of international diversification can be surprisingly elusive.