Is Portfolio Diversification More Difficult Than It Was in the Past?

Key Points:
– Diversification, which is crucial for risk reduction in investment management, may seem to disappear when it is needed the most.
– The accessibility of mutual funds and ETFs has expanded the range of securities available to investors, making it easier to invest in various markets.
– However, despite this increased accessibility, diversifying across global stock portfolios may not effectively reduce portfolio risk as it did in the past.
– Through an examination of correlation coefficients among different global stock indices in different decades, it is evident that correlations have increased over time.
– The trend of increasing correlation among stock indices can be attributed to globalization and the interconnectedness of equity markets.
– Investors may no longer benefit from diversifying their equity allocations across different international stock indices.
– The optimal index combination for diversification purposes in the present is less effective in reducing volatility compared to historical portfolio volatility.
– Whether the trend of increasing stock index correlation will continue or not remains uncertain. The recent global events may play a role in changing this trend.
– Monitoring the decoupling of stock market performance and the correlation among global stock indices will be important in the future.
– The opinions expressed in this article are the author’s own and should not be considered as investment advice.
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