International Developed Country Stocks

Most of what was said above about small-cap stocks goes equally well—except more so—for international equities. The sector is a vast and inefficient one, hence manager skill and hard work can pay off handsomely. On the other hand, trading costs (and custody costs9) can be very high, bleeding away much of the advantage of international investing. Fortunately, as free market economic systems gradually spread throughout the world, the most bizarre and inefficient local market practices are fading away, to be replaced by trading institutions and mechanisms that look more like those in the United States and Europe. This is, however, a slow process, as older, inefficient players continue to exercise enough political clout to slow their own march toward oblivion.

There are many criticisms of international diversification. Some investors believe that international diversification is unnecessary, pointing to the very high correlations between the U.S. markets and international developed country markets that have persisted in recent years. Other investors concede the long-term benefits of international diversification, but point out that during very negative periods in the U.S. markets the international markets are also highly likely to be weak, rendering international diversification useless just when you need it most. Finally, some investors, even those who recognize the benefits of international diversification, simply distrust foreign markets (and ...

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