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Concept Four: Global Diversification Reduces Risk

We've all read about the concept of a "global village" — that we're getting closer and closer together. Technology is creating a new paradigm in which businesses around the world are tied together, just as markets are now tied together. Then why should you include an international institutional asset class in your portfolios? The answer is that American equity markets and international markets do not move together. Individual stocks of companies around the world with similar risk have the same expected rate of return. However, they don't get there in the same manner or at the same time. As you can see from Exhibit 5, there are tremendous dissimilar price movements between international and U.S. asset classes.