The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

Chart 13

Invest Overseas and Diversify?

You can reduce your risks and maximize profits by investing globally, right? Balderdash! While overseas investing is quite the rage these days, and has also been successful recently (that's why it's quite the rage), there is a lot less diversification and safety in overseas investing than the marketers of these products (mutual funds?) want you to believe.

Why? As this book shows with varying charts, the world's nations are far more economically linked and stock market linked than most folks believe—tremendously so. While all the ocean's waves don't match perfectly, as any California coastal kid knows, when the surf's up, it's up. This chart compares the U.S. market with the London market from 1958 through 1977. Note how closely the two indexes correlate. Note in 1960–1962 and 1972–1975 where a pronounced movement in the United States was perfectly mirrored in England for bull and bear markets. Most often, when the U.S. market is in a major upswing or decline, within a few jiggles of a hair's breadth most of the world's markets will be too. It's been that way for decades. Perhaps the alltime classic example was the 1929 correlation in England, France, Germany, and the United States (see Chart 29).

Why then do we hear so much about diversifying overseas lately? Even though the United States makes up half the world's stock market—and adding in Japan and England gives 80 percent—that other 20 percent has risen in price far more than U.S. stocks ...