Prudent diversification in the equity markets generally includes an allocation to foreign investments.

The main reason to allocate money outside the US or Canadian equity market is that the performance of foreign markets has a low correlation to the performance of North American markets. For instance, if the US market is trending down, one's allocation to foreign markets may move higher (or not lose as much, at least). The same diversification principles apply to the fixed income market.

World fixed income markets move in different directions based on the relative strength of their economies. For example, the economies of the European Union are growing at a much slower rate than the United States. Consequently, European bond market yields have not risen as quickly as interest rates in the US and European bonds have performed better than bonds in the US. While the Federal Reserve has raised overnight rates twice this year and is expected to raise rates again both next week and later this year, the European Central Bank (ECB) has left rates unchanged this year and is expected to leave rates unchanged for the remainder of the year. We expect the European bond market to continue to outperform the US bond market this year.

The UK, because it is not included in the euro currency, has its own bond market. The performance of the economy in the UK has been vastly different from the rest of Europe for at least a year. GDP growth and consumer spending have been so strong there that the Bank of England has raised rates four times thus far in 2004. Investors shunned the bond markets in the UK for the first half of the year as rates were rising and have only recently begun to buy bonds again. The reason they have begun to invest again is that rising interest rates have slowed the pace of growth and the Bank of England should be less aggressive in raising rates going forward.

Investing in the bond markets of other countries need not be a time consuming or particularly costly exercise. There are hundreds of mutual funds that specialise in the European and UK bond markets ? choose carefully, taking the fund fees into consideration and your portfolio can be successfully diversified.