I want to revisit an aspect of global equity diversification that I haven’t covered in my previous posts. This is the fact that diversification will not protect you from losses if the global economy tanks. As the nursery rhyme says, “all the king’s horses and all the king’s men could not put humpty dumpty back together again.” Market risk is what investors bear when they hold a diversified portfolio. Just as a rising tide lifts all boats, a crashing tide dumps all boats!
That is the bad news. The good news is that global diversification may still offer better protection against downside risk compared to investing locally. To see whether there is any truth in this, I want to address to questions in this blog. Question #1: Does a globally diversified portfolio fall more or less than individual markets on average? Question #2: when the dust settles and markets recover, does a