US stock market has just closed for the day with all major indexes again taking big dives: Dow Index is down by 387 points (a single-day 2.9% drop, 2^nd worst of this year), S&P 500 down 44 points (3% drop), and NASDAQ down 57 points (2.2%). In the rest of the world, London’s FTSE Index was down 1.9%, Tokyo’s Nikkei up 0.8%, India’s SENSEX down 1.4%, and Australia’s ASX up 1.1%. These are the times when many investors begin to ask if they should jack up their stock holding in foreign markets. After all, the domestic and foreign markets rarely move in lockstep, and having a chunk of my asset allocated to foreign stocks should minimize any impact of a major domestic slump.

But increasing globalization over the last few short decades have changed the financial landscape of the world. These days markets across continents quickly respond to each other’s turmoil, so much so that the day-to-day fluctuations are considerably more correlated than before. To give one example, the largest slide of this year happened on February 28, when major US indices fell an average of 3.5%, reacting to a 9% drop in Chinese stocks the previous day.

Be that as it may, I still think it is a good idea to have a part of my portfolio allocated to an index fund that covers a broad swath of foreign equity markets. (I am heavily biased towards index funds because of their small operating costs, and also because they incur less tax.) Even though cross-correlations among domestic and international markets have increased, they are yet to reach a point where the benefit of diversification no longer exists. Given that, such a mixing strategy gives me an easy way to construct a simple but smart portfolio.

See related posts:

1. Keeping it simple