In this paper, several empirical tests are applied to evaluate: 1) the effectiveness of international diversified stock portfolios in bull and bear markets; 2) the potential gains of diversification strategies for both developed and developing country investors. The results suggest that the correlation structure of global equity market returns is not constant over time. Correlation coefficients rise during economic crisis and decline again when the crash is over, but do not drop back to the original level as before the crisis. The total risk of foreign investment can be decomposed into the local stock return risk and the currency risk. We also find that US investors accrue potential diversification gains in terms of return enhancement. However, the decrease on return offsets the decrease on standard deviation, making the performance of international portfolios no better than that of domestic investment.