A Closer Look at Global Diversification
We frequently mention the importance of employing global diversification to manage investment risks while pursuing expected returns. The broad concept is simple: Don’t put all your eggs in one basket.
That said, beyond the simple adage, questions may remain. A recent Dimensional Fund Advisors paper addressed one of them: Since U.S. stocks have outperformed international and emerging markets stocks over the last several years, is it still worthwhile to invest worldwide?
If you’d rather skip to the compelling conclusion, the short answer is, yes, global diversification is still worth it. Not only do the last several years tell us nothing about the next several years, they could lull U.S. investors into a false sense of home-biased complacency. To emphasize this point, we need only point to the 2000–2009 “lost decade,” when the S&P 500 took a depressing 10-year dive, while most of the world’s indexes soared.
Bottom line: You never know where your next source of best returns will be found, so it’s best to go global – and stay that way.