Global Diversification Reduces Risk Further International and UK equity markets have low correlation, therefore your portfolio should include holdings in International equity markets to reduce risk. The correlation of UK, Japanese, European/Continental and Pacific Rim stocks is lower than the correlation between the large and small segments of the UK market. Therefore, by diversifying internationally, you can lower the volatility of your portfolio by combining asset classes with low correlation, while still enjoying the superior returns of International equity markets. The difference between the FTSE All Share UK Index (£) and the Morgan Stanley EAFE Index (£). Monthly annualised returns.    The chart above shows the importance of global diversification. Investment returns in foreign markets have outperformed domestic market returns at irregular intervals, which emphasise the importance of maintaining a globally diversified portfolio.   When two investments have similar long-term returns, and yet have such dissimilar patterns in their short-term outcomes, then you can preserve your portfolio's growth potential and reduce risk at the same time by investing in both. The important thing to realise is that mixing domestic and foreign stocks is a powerfully advantageous investment strategy. While investors all over the world tend to emphasise investments in their own home markets, if you do not invest in overseas equities at all, you miss two important benefits. First, overseas investments allow you to participate in the growth of the whole global economy. And second, international equities are a powerful diversifier, allowing you to reduce risk without sacrificing the growth potential of equity investments   Find out how to reduce risk via Global Diversification <<Back Investment Philosophy Tour: Design a portfolio which is efficient