Diversification of Portfolios in the Global Financial Market Essay

Diversification of Portfolios in the Global Financial Market - Essay Example The problem of domestic surplus also has its solution in the global market. With a greater number of buyers, investors will be able to sell what no one in their country will be willing to buy. Simply put, with more buyers and sellers now more interlinked with each other, globalization has given the financial market a global scope. With a greater scope arise complexities and more risks and seemingly ironic instances. As countries have become more interlinked, they begin to share similar reactions to economic shocks. While similar reactions may make it easier for market analysts to determine how the world will react to different economic shocks, the presence of varying political and economic systems in the global financial market make external and internal economic forces more unpredictable. Greater unpredictability simply means greater risks. Again, the simple solution to this risk is the placing of eggs into different baskets. One could argue that it is pointless to diversify portfol ios in a financial market where countries almost always react in similar ways. However, as Bordo (2000) explains, emerging markets are more susceptible to fluctuations, â€Å"bust and booms† he calls them, as the result of â€Å"open capital markets.† This implies that while one emerging economy may offer huge returns in a couple of days or weeks, investors still need to diversify their investments because it is difficult to determine how emerging economies will do in the longer runs. The disadvantages of portfolio diversification.