| VEIEX tracks stocks in 18 emerging markets of Europe, Asia, Africa, and Latin America. |
Summary:
Diversification basically means "don't put all your eggs in one basket". Investors may be uncomfortable
with a stock portfolio that is 100% US stocks. Accordingly, they may choose to replace some of their US
stocks with foreign stocks. Foreign stocks do not necessarily rise and fall at the same time as US stocks
and do provide some measure of diversification for US investors.
However, foreign stocks provided very little diversification over the last 5 years. As US stocks fell from
2000 through March of 2003, foreign stocks fell as well. As US stocks rose from the 2003 lows, foreign
stocks again moved in the same direction as US stocks... up.
Diversification basically means "don't put all your eggs in one basket". Investors may be uncomfortable
with a stock portfolio that is 100% US stocks. Accordingly, they may choose to replace some of their US
stocks with foreign stocks. Foreign stocks do not necessarily rise and fall at the same time as US stocks
and do provide some measure of diversification for US investors.
However, foreign stocks provided very little diversification over the last 5 years. As US stocks fell from
2000 through March of 2003, foreign stocks fell as well. As US stocks rose from the 2003 lows, foreign
stocks again moved in the same direction as US stocks... up.
| How do I use this information? Foreign stocks may improve your equity returns. But don't rely on them to provide significant diversification. If you are nervous about your stock positions, consider diversifying into another asset class such as bonds, CDs or real estate. If you are not debt free, pay off some debt. |
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| Can Foreign Stocks Diversify Your Stock Portfolio? Strategy Research: Summary, Analysis and Long Term Test Results |
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Observations:
● US and Foreign Stocks tend to move in the same direction (long term).
● US and Foreign Stocks tend to move at different rates.
● Foreign stocks have not provided significant long term diversification.
● US and Foreign Stocks tend to move in the same direction (long term).
● US and Foreign Stocks tend to move at different rates.
● Foreign stocks have not provided significant long term diversification.
2000 2001 2002 2003 2004 2005
| - 60% |
| Japanese Stocks (EWJ) |
| Emerging Markets (VEIEX) |
| 0% |
| 60% |
| 40% |
| 20% |
| - 20% |
| - 40% |
| US Stocks (S&P 500) |
| European Stocks (VEURX) |
| - 100% |
| - 80% |
↑
| 2003 Low |
| US, European, Japanese and Emerging Stock Markets |