The comments of both Turner and Davenport are technically correct, although incomplete in terms of an in-depth discussion. The customary arguments for international investing include increased security selection, possible excess returns, and potential risk reduction due to low correlation with the U.S. market. However there are a number of arguments against international investing, including some evidence that correlations are increasing and that they increase when market volatility is highest, thereby diminishing diversification when it is most needed. There have definitely been significant periods of time when international stocks have under-performed the U.S. market. Although transaction costs have been falling, there are still a number of barriers such as legal and accounting differences, tax regulations, lack of liquidity, etc. Finally, it does appear that industry factors now dominate country or regional factors, but country factors still remain important. Using only U.S.-based global companies can expose domestic-only portfolios to significant country risk |
