New research sheds light on the benefits of diversifying investment portfolios globally. Diversification lowers the risk that all of one’s investments will decline in value at the same time, and it increases the likelihood that some of one’s holdings will rise. According to a recent working paper published by the Yale International Centre for Finance, an important factor has been overlooked in diversification: the expanding set of investment opportunities from the increase in investable markets worldwide.
In order to analyse the benefits of diversification over time, the authors collected all available data from the past 150 years. Among their conclusions:
Economic integration in the last decades of the 20th century led to highly correlated markets, diminishing the benefits of global diversification. But market liberalisation in developing countries increased investment opportunities. Both aspects of globalisation should be considered in assessing the benefits of diversification, say the authors.
Source: The Dual Benefits of Global Diversification, Economic Intuition, Fall 2001; based on William N. Goetzmann, Lingfeng Li and K. Geert Rouwenhorst, Long-Term Global Market Correlations, Working Paper No. 00-60, Yale International Center for Finance.
For abstract http://papers.ssrn.com/sol3/papers.cfm?abstract_id=288421
For more Economic Intuition research summaries http://www.economicintuition.com
For more on Market Liberalization http://www.ncpa.org/iss/eco
FMF Policy Bulletin\3 September 2002
