Diversification benefit of international developed country stocks

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Avih
Posts: 1
Joined: Mon Mar 26, 2018 4:36 pm

Diversification benefit of international developed country stocks

Post by Avih » Tue Mar 27, 2018 3:36 pm

Does anyone have information on recent studies on the diversification benefit of holding international developed country stocks in a portfolio which has a large US Total Market index fund?

peppers
Posts: 1342
Joined: Tue Oct 25, 2011 7:05 pm

Re: Diversification benefit of international developed country stocks

Post by peppers » Fri Mar 30, 2018 4:05 pm

Welcome to the forum

This is a link to BlackRock's 2018 Global Investment Outlook. It may be of interest to you.

https://www.blackrock.com/corporate/lit ... ook-us.pdf
"..the cavalry ain't comin' kid, you're on your own..."

alex_686
Posts: 3920
Joined: Mon Feb 09, 2015 2:39 pm

Re: Diversification benefit of international developed country stocks

Post by alex_686 » Fri Mar 30, 2018 4:20 pm

Mononationals: The Diversification Benefits of Investing in Companies with No Foreign Sales
https://www.cfapubs.org/doi/abs/10.2469/faj.v73.n2.3

It has been falling. International developed country stocks are dominated by multinational firms. These multinational firms are exposed to the same forces as their US multinational counterparts. I will point out that the largest DM stock are Royal Dutch Shell followed by Nestle, and Novartis. All of them have similar country exposure as their US counterparts.

Correlations between a the country a corporation is headquartered in and how that country is doing has been falling.

If you can find a stock that has its sales in a particular country then you still get the benefits, but this does not lend itself well to indexing.

MoneyMarathon
Posts: 161
Joined: Sun Sep 30, 2012 3:38 am

Re: Diversification benefit of international developed country stocks

Post by MoneyMarathon » Fri Mar 30, 2018 4:26 pm

If international had perfect correlation with US over 20 years, some would say there was no diversification benefit. But maybe one of them has 4% higher annual return than the other (this is consistent with perfect correlation, with the mathematical meaning of correlation). If you’re not sure which one would outperform, then holding both gives you a weighted average of the two returns. This improves your protection against the worst case, where you go all in on the wrong one.

Many studies focus on the correlation and whether that diversification lowers volatility, but that is just one way of looking at it. You get that benefit too, if it persists, by diversifying.

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