Why Your Portfolio Isnt As Diversified as You Think

Global markets are increasingly moving in step.

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The old investing wisdom was that adding international--and especially emerging markets--to your portfolio would result in some zig zagging in volatile markets.

But the reality of this market is that stocks around the globe are moving more in step. Lately, they've converged aggressively to the downside, says the staff of Standard & Poor's "The Outlook."

"Specifically, the MSCI-EAFE index, a developed international equity benchmark, is now moving in unison with the S&P 500 index 89% of the time, up from 80% on August 31. Similarly, the MSCI Emerging Markets index's correlation to the 500 has jumped to 81% from only 68% two months ago. Worse yet, the MSCI Frontier Market index, long touted for its ability to 'zig' when the 500 'zags,' has seen its 500 correlation surge to 63 percent from a mere 9 percent on August 31."ot even small and midsize stocks have offered refuge, says S&P, as they're now moving with the S&P 87 percent of the time, up from 74 percent two months ago.

Not even small and midsize stocks have offered refuge, says S&P, as they're now moving with the S&P 87 percent of the time, up from 74 percent two months ago.

S&P says there's a silver lining in all this: "While the rising global equity correlation has magnified the pain of this bear market, it is also likely to boost gains as markets begin to recover, by our analysis."