In 2022, I published a book, The False Hope of Global Diversification: Confessions of a Portfolio Management Maverick. Doing the research for this book, I hired a Columbia University Graduate Student, Max Grossman, to research my premise: that in recent decades and perhaps into the future, global markets are tightly correlated and therefore there is no need to invest internationally.
Max did the research, comparing rolling five-year periods of S&P 500 returns to the MS EAFE and MSCI EM indexes, and we discovered we were right! Using this methodology, there were tight correlations. Further, during times of distressed stock markets, the Global Financial Crisis being one example (more in the book), markets fell in value throughout the globe.
In January of 2026, Professor Bahram Parineh approached me to work with a group of his Sbona Honors class at San Jose State University. Together, we created a curriculum designed to refresh and expand on the research Max and I did in 2021. After a year where the dollar declined in value, and US markets were distinctly outperformed by non-US markets, is my thesis correct? And, if not, what changes do I need to make to my portfolio process to adjust to the new data?
My study group is led by Carolina Casillas, and includes Faith Ho Russell, Makanel Dewill, Zachary De Leon, and Ingyin Mon. We met for the first time on February 5, 2026, and after a round-table discussion, I assigned the following tasks.
Our central question is: Is it necessary or even helpful to use non-US stocks as a way to diversify portfolios? Does international diversification work?
Here are the questions I asked for research on…
Faith: Did Non-US equities outperform US equities in 2025?
Zach and Nel: What was the percentage of performance in non-US markets was the currencies, instead of the underlying stock performance? In other words, what part of that outperformance was simply because the USD underperformed the local currencies?
Carolina: If fundamentals mattered, what market sectors drove the fundamentals outperformance in these other markets?
Ingyin: Do currencies mean-revert, or is there a growth dimension to currencies that can be taken advantage of by investors over longer terms, 3 years or more?
When we met yesterday, we had some clear-cut answers and some repositioning of questions that led to other assignments.
Faith: Did Non-US equities outperform US equities in 2025?
So, the conclusion was. YES, non-US markets outperformed. Zach and Nel: What was the percentage of performance in Non-US Markets that was the currencies instead of the underlying stock performance? In other words, what part of that outperformance was simply because the USD underperformed the local currencies?
My request was a bit confusing here. Do we look at all currencies in the respective economies? Given that the Euro dominates most of Europe, the GBP is the currency of the UK, and the Australian Dollar is used in Australia, which currencies to we use? Their conclusion, however, was that in every case, fundamental factors beyond currency drove up the price of their respective stock markets. Hmm…we need to explore this more thoroughly…
Carolina: If fundamentals mattered, what market sectors drove the fundamentals outperformance in these other markets?
This was also a confusing question, so Carolina broke down performance by country, which we will see sets up this week’s assignments. Carolina gave us some valuable information. She broke down performance on a country-by-country basis.
Her data above leads us to work on disassembling the country’s performance.
Ingyin: Do currencies mean-revert, or is there a growth dimension to currencies that can be taken advantage of by investors over longer terms—3 years or more?
Ingin discovered that over a longer period of time, currencies do mean-revert. This might be why, in my previous research, I could see tight correlations using five-year rolling periods. Over those time frames, the currency effect is cancelled.
We will use Carolina’s table above to dig deeper into why these non-US markets outperformed, as well as how persistent is the currency dimension of the outperformance.
This week’s meeting led to more questions than answers. We came up with a new question. Beyond just currency risk and political risk, what other risks are US investors subject to when investing internationally?
From our discussions, the extra risk seems to be company risk.
Carolina cited that Switzerland has a heavy emphasis on pharma companies…and a few others. Why is this? And further, if pharma stocks take a beating, will it surprise the investor who has invested in Switzerland that their investments are affected by this?
Zach’s assignments took Japan into consideration. Culturally, he discovered that many companies in any industry are tied together by financial commitments. So, what endangers one endangers the entire economy. This is probably another risk that US investors do not consider when they invest in Japanese companies. Americans tend to look at companies and assume that their economies work like ours, when they do not.
Nel’s countries included Korea, which has similar cultural/economic issues as Japan. Also, he had China. I bought up that China’s currency, the CNY, has tight currency controls. This has to be another factor to consider when investing in China. More on this next week.
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What do I gain by investing internationally? Why should I not invest outside of the United States? Our lesson today looked at 10 different countries. We looked at three factors over the last 5 years: currency, which sectors drove the country’s performance, and, within those sectors, were there any dominant companies? I asked my scholars to take what we have learned up until now and put it in a matrix:
They also discovered what correlation between two variables means. If the two variables behave exactly the same, they have a correlation of 1. If, on the other hand, they behave exactly the opposite, they have a correlation of minus 1.
Why is correlation so important to investing?
To answer that, one must go back to Harry Marcowitz and Modern Portfolio Theory. (MPT)
MPT holds that you can increase return with less risk if you create a portfolio with plenty of non-correlating assets. The premise of The False Hope of Global Diversification that I am having my scholars either prove or disprove is that in the modern era, you simply can’t do that using global stocks.
In order for global investing to be useful, we need to see non-correlation from assets in a global portfolio. Not just a modest correlation, but NON-CORRELATION. Here’s what we learned today:
The Korena stock market has been dominated by their IT sector, which is dominated by Samsung. When reviewing correlations between Samsung and the US tech sector, the 2021-2025 correlation is 0.74.
Taiwan’s stock market is dominated by the IT sector, which in turn is dominated by Taiwan Semiconductor. When compared to the US Tech sector, the correlation is 0.59
Germany’s stock market is dominated by Siemens, in the industrial sector. When compared to the US Industrial sector, the correlation is 0.80.
Britain is fascinating. Its financial services sector dominates. The key company is HSBC. It has correlation, but relatively low to our financial services index, but it is still 0.25 during the test period.
Switzerland also presents a unique case. It is dominated by the pharma sector, which is in turn dominated by two companies, Roche and Novartis. Both correlate with the US healthcare sector, 0.67 and 0.33, respectively. But those two companies have no correlation. We will have more on this later.
France is dominated by industrials. The key company in the industrial sector is Schneider Electric. Schneider has a 0.61 correlation to the US Industrial sector.
Japan does not have one dominating company or sector. So instead, we compared the Japan country index to the S&P 500 index. Correlation is 0.71
Over the five-year period, China’s Communication Services sector dominated the market, specifically Alibaba and Tencent. To my surprise, the correlation between those companies and the US Comm Services sector was 0.31 and 0.49, respectively, and those two companies had a 0.83 correlation.
India is dominated by a few conglomerates. Just like Japan, we simply compared the Indian stock market to the US market and came up with a correlation of 0.90.
The notable exception to the loose or tight correlations of these 9 countries to the US market was Brazil! Brazilian equities did not have a dominant sector, but if comparing the entire market to the US stock market, the correlation from 2021 to 2025 was indeed negative at -0.219.
So our conclusion is that while currency was not what drove the differences in the markets, it was a factor, but certainly not the only factor. Nine of 10 markets had at least a loose correlation to the US market.
This reinforces the premise. If I am a US dollar investor, I gain no MPT inspired by diversification by investing internationally. Keep the money in the United States.
