I remember the first time I truly trusted in diversification. It was right after the Great Financial Crisis, and everywhere I turned, the advice was crystal clear: don’t put all your eggs in one basket. For years, I felt safe knowing my investments were spread across regions and assets. But lately, it really feels like what’s happening on Wall Street spreads instantly to every corner of the globe. So, is global diversification really protecting us anymore? Let’s walk through what’s going on and see what you can actually do.
What’s Happening: The Rise in Global Market Correlations
Over the past decade, it seems like global stock markets just move together—sometimes almost too perfectly. When the S&P 500 sneezes, the MSCI Emerging Markets Index seems to catch a cold. During the COVID-19 crash in early 2020, for instance, the correlation between US and non-US equities hit record highs, above 0.85 (on a -1 to 1 scale). That’s pretty wild when you think about it.
According to BlackRock’s 2023 analysis, major developed and emerging markets have shown rising interconnectedness, making traditional diversification less effective in certain periods.
So, what's the driver? Globalization, crazy-fast information sharing, cross-border investment flows, and coordinated monetary policy all play a part. In other words, the world is smaller—and markets reflect that every single day.
Does Diversification Still Work—Or Did It Fail?
Honestly? It depends on how you define “work.” Diversification used to mean that when one market tanked, another might go up, or at least stay flat. Lately, though, in extreme events, it feels like everything falls together. But on calmer days, diversification still reduces risk.
Real-World Example: The 2022 Selloff
- US stocks, European equities, and even historically defensive assets like bonds, all dropped simultaneously.
- Traditional “safe havens” didn’t offer much protection.
- Alternative assets like commodities and some absolute return strategies did comparatively better.
Long story short? Diversification still helps, but the level of protection it offers seems to shrink during major crises. Kind of a tough pill to swallow, I know.
Don’t assume that spreading your investments globally will always reduce your risk as much as it once did—especially in huge selloffs.
Ways to Protect Yourself When Diversification Isn’t Enough
- Explore non-traditional assets: Think alternatives like gold, real estate investment trusts (REITs), infrastructure, commodities, or even some private assets. These sometimes march to a different beat.
- Focus on “true” diversifiers: Look for assets with low or negative correlations to major stock indexes, though these are getting harder to find.
- Review your correlation data occasionally: Markets change, and so do their relationships. It’s smart to update your assumptions every so often.
- Stay liquid and flexible: Don’t get stuck. Make sure you can shift gears if the environment changes rapidly.
| Asset Class | Typical Correlation with Global Equities |
|---|---|
| US Bonds | -0.2 to 0.3 (varies over time) |
| Gold | 0.0 to 0.2 |
| Real Assets (Commodities, Real Estate) | 0.1 to 0.3 |
| Hedge Funds, Alternatives | -0.1 to 0.5 (strategy dependent) |
Summary: Should You Still Diversify?
To be honest, I don’t see a world where diversification is useless. But you may need to tweak your expectations and try some new strategies. Here’s what matters most:
- Diversification still helps over the long run: Just remember—its power drops during “risk-off” shocks.
- Correlation isn’t static: It shifts, so revisit your plan every year or two.
- Blend in alternatives: Unique assets can cushion big blows, even if nothing’s perfect.
- Start with your goals and risk: There’s no one-size-fits-all answer—build what works for you.
Key Takeaways for Diversifying in a Correlated World
Explore fresh market correlation data and advanced diversification resources at MSCI’s Correlation Insights or BlackRock Global Market Outlook.
FAQ ❓
In the end, the world keeps changing, and so do the rules of the game. If you’re confused or want to talk more about your own approach, don’t hesitate to drop your questions below or check out the recommended links. Let’s help each other navigate this!