The writer is a financial journalist and author of ‘More: The 10,000-Year Rise of the World Economy’
It has been described as the easiest free lunch in investment: diversify your portfolio and you achieve a better trade-off between risk and reward. That still seems true when it comes to the number of stocks that investors own within their domestic market.
But new research by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School shows it has not always been the case with international diversification.
Writing in Credit Suisse’s Global Investment Returns Yearbook, the academics examine the history of international diversification since 1974, when Bruno Solnik wrote an influential paper on the subject in the Financial Analysts Journal. In particular, they focus on the experience of US investors.
Many American institutions increased their overseas asset allocation significantly in recent decades; the proportion of non-domestic equities held by US pension funds rose from 1 per cent in 1980 to 18 per cent in 2019.
This diversification did not pay off in…
