| International
Diversification |
Theory into Practice |
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| The recent strong performance of U.S. stocks does not mean
that there is no longer any reason to invest in foreign markets, to the contrary, this may
be the very time to be thinking about greater diversification. Consider the long-run
perspective illustrated below. The chart shows the difference between the S & P 500
Stock Index and the Morgan Stanley EAFE Index as measured by their respective 12 month
rolling returns. |
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| Another way to look at this relationship is to form
several portfolios from various combinations of U.S. and foreign stocks and compare them
in terms of relative risk and reward. This is here illustrated for the same stocks
and time frame. |
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| As you can see, the risk of the portfolio goes down as you
add foreign stocks to a U.S. portfolio, even as the long-run average return is rising. So,
the risk of a domestic portfolio is greater than that of a global one, even though foreign
stocks, in isolation, exhibit higher risk than U.S. stocks. |
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