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You can run but you can't hide.

Even well-diversified investors learned that the hard way in recent months, when foreign stock markets failed to provide much protection against faltering domestic prices.

Global diversification is supposed to provide a cushion and an overall smoother ride since foreign stocks respond to different economic variables compared to their U.S. counterparts. But it doesn't always work that way, at least to the degree shell-shocked American investors would like.

If anything, the correlation or movement between U.S. and foreign stocks has risen in recent years, reducing the benefits of diversification. This reflects increased economic integration around the globe and closer trading ties among stock markets in different nations.

Correlations tend to rise even more during market shocks like the credit-crunch fallout late last year and earlier this year. At such times, traders tend to react to the same news and developments, and often face the same constraints like a sudden lack of liquidity.

“When extreme events happen, trading all goes in the same direction,” said Peng Chen, chief investment officer and president of Chicago researcher Ibbotson Associates during a recent review of diversification strategies.

In short, you can't assume a well-diversified portfolio will bail you out of every jam. But you also shouldn't conclude diversification is worthless. With recent high market volatility still a fresh memory, here are some portfolio-building tips for putting it in perspective:

' Global diversification still offers benefits, but not so much as in past years.

The trend is toward more global integration and higher correlations, as Chen noted, yet stocks in other nations still don't move in perfect tandem with U.S. equities. Nor do individual stocks or firms in different industries, whether here or abroad, move in lockstep. As long as stocks behave somewhat differently, you can expect a bit smoother ride in your portfolio from diversifying.

Then again, diversification shouldn't be your sole motivation in venturing abroad, as foreign stocks and economies also provide the potential for faster growth and higher gains.

' Bonds and cash still provide diversification help.

Unlike equities around the globe, the link between stocks and bonds has grown less direct in recent years, said Chen, reflecting in part the 2000-2002 bear market when bonds held their ground while stocks got pounded. Fixed-income assets thus continue to provide diversification help, especially if you layer in various types of bonds such as corporates, governments, high-yield and foreign bonds, supplemented with money-market or other cash instruments.

' Other assets offer further diversification benefits.

As painful as the housing slump has been, real estate investments also help diversify a stock-based portfolio, said Chen. So do various commodity assets such as precious metals, industrial metals, oil, gas, food, lumber and so on. You can invest easily in such areas by purchasing shares in mining and other commodity companies or mutual funds that invest in them. You also can find individual stocks or funds focused on real estate such as real estate investment trusts or REITs.

In general, Ibbotson suggests investors place five to 10 percent of their portfolios in alternatives such as real estate and commodities, Chen said.

Notably, Ibbotson found that hedge funds — private limited partnerships pitched to affluent clients that often use unusual investment strategies — as a group don't provide much diversification. But they are good at generating returns that have beaten the market over time, Chen said.

The upshot is that a diversified portfolio can still help generate solid returns with a fairly smooth ride, but you need to look beyond foreign stocks to get the job done. You also need patience, since the diversification cushion often freezes up in a crunch but returns after a while.

“Investors should realize (financial) crises tend to be short-lived,” Chen said.
So unless you have a highly leveraged portfolio or sudden cash needs, you should be able to weather them.

This article appeared in the May 18 issue of the Arizona Republic.
Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.

I talked to coach Ken Whisenhunt for a few minutes this morning, before he addressed the team's rookies.

They reported for work Monday morning, the day before the 14 sessions of  "organized team activities" begin.

Rookies and veterans will participate in the practices over the next month. Here's part of the interview. I'll post more information later.

Q. What do you want to accomplish with these 14 sessions?