Why Diversifying Abroad Doesn’t Reduce Risk!
For typical conservative value investors diversification doesn’t make any sense. But, rather than watching our best ideas and specializing in what we understand international diversification is praised by mainstream economists and academics as a means of reducing risk. Here is an interesting article which outlines the risks in diversifying internationally. (Click here to skip the introduction and read the article)
Article Introduction (Via Vox.eu)
Investing in foreign markets may seem a good strategy for reducing risk. But this column shows that financial globalisation has resulted in increased correlation amongst international asset prices, thereby eliminating the diversification opportunities it was supposed to let investors harness.
Article Excerpts (Via Vox.eu)
“Don’t put all your eggs in one basket” is probably amongst the oldest pieces of advice for investors. Many investors try to reduce risk by diversifying across industries, asset classes, or borders. “
“The success of this strategy depends on the co-movement between different asset prices – higher comovements limit the possible gains from diversification. But what would happen if the very act of chasing these diversification opportunities destroyed them?”
“In this sense, the gains from international diversification are akin – at least in part – to a Fata Morgana. Investors may chase it, only to discover that it perennially disappears in the distance.”
Click here to read about the failures of international diversification
