Investments, tenth edition

  Investors’ Challenge: Markets Seem Too Linked 

 It’s one of the golden rules of investing: Reduce risk by 

diversifying your money into a variety of holdings—stock 

funds, bonds, commodities—that don’t move in lockstep 

with one another. And it’s a rule that’s getting tougher 

to obey. 

 According to recent research, an array of investments 

whose prices used to rise and fall independently are now 

increasingly correlated. For an example, look no fur-

ther than the roller coaster in emerging-markets stocks 

of recent weeks. The MSCI EAFE index, which measures 

emerging markets, now shows .96 correlation to the S&P, 

up from just .32 six years ago. 

 For investors, that poses a troubling issue: how to main-

tain a portfolio diversified enough so all the pieces don’t 

tank at once. 

 The current correlation trend doesn’t mean investors 

should go out and ditch their existing investments. It’s just 

that they may not be “getting the same diversification” 

they thought if the investment decisions were made 

some time ago, says Mr. Ezrati, chief economist at money-

management firm Lord Abbett & Co. He adds that over 

long periods of time, going back decades, sometimes 

varied asset classes tend to converge. 

 One explanation for today’s higher correlation is 

increased globalization, which has made the economies 

of various countries more interdependent. International 

stocks, even with their higher correlations at present, 

deserve some allocation in a long-term investor’s hold-

ings, says Jeff Tjornehoj, an analyst at data firm Lipper Inc. 

Mr. Tjornehoj is among those who believe these correla-

tions are a temporary phenomenon, and expects that the 

diversity will return some time down the line—a year or 

few years.  

Source:  Shefali Anand, “Investors Challenge: Markets Seem Too 

Linked,”  The Wall Street Journal,  June 2, 2006, p. C1. © 2006 

Dow Jones & Company, Inc. All rights reserved worldwide. 

 WORDS FROM THE STREET 

27

11.7

1

10

20

30

40

50

U.S. Stocks

Global Stocks

Number of Stocks

Percent Risk

0

20

40

60

80

100