Ever since the financial crisis, when the correlation of all risky assets rose towards one, investors have been hearing that globalization has caused the world to become flat and the benefits of diversification to disappear. It’s a refrain that I hear repeatedly from the media, as well as from investors concerned about their portfolios. To paraphrase Mark Twain, the rumors of the death of the benefits of diversification have been greatly exaggerated. What’s so surprising is that the evidence is right in front of you.
To demonstrate that there are still significant benefits to diversification, consider the returns of the past several years of the various funds of Dimensional Fund Advisors, when diversification supposedly wasn’t working because correlations had risen.
In 2009, while its U.S. large company fund returned 27 percent, it was outperformed by DFA’s emerging markets, emerging markets value and emerging markets small fund by 42 percent, 65 percent and 72 percent, respectively. In addition, its international large value and international REIT funds outperformed their domestic counterparts by 10 percent and 8 percent, respectively.
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