Shots heard ’round the world

Adding an international fund to your portfolio is a bit like taking a daily multivitamin: It’s supposed to be good for you, but it’s hard to tell, really, what good it’s doing. At least in June, adding foreign stocks to your portfolio haven’t done much for you.

Last month, U.S. stocks fell 2.06%, thanks in large part to the troubles in Greece. The rest of the world fared no better:

  • Germany: -2.6%
  • France: -3.04%
  • United Kingdom: -1.61%
  • Australia: -4.78%
  • Japan: -1.79%

greeceThe Europe, Australasia and Far East index (EAFE), which measures world markets outside the U.S., fell 2.98%. An international fund would have been more like a placebo than a panacea.

One of the annoying things about international investing is that markets are highly correlated with the U.S. when the news is bad. When the news is good, correlations are often lower — which means an international fund might or might not be effective.

A recent paper shows that the U.S. leads economic cycles for Germany, Great Britain, Canada and Mexico. (Hat tip to The Big Picture.) In theory, if you exclude event-driven events like defaults, you’d get the most diversification benefits from investing in Japan, France and Italy.

But bear in mind that low correlation isn’t always good, either. For Japan, at least, the low correlation stems from the fact that the U.S. has been growing the past 25 years, while Japan has not.

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