This paper conducts a theoretical and empirical investigation of the risks of globally diversified portfolios of stocks and bonds and of optimal intertemporal global portfolio choice for long horizon investors in the presence of permanent cash flow shocks and transitory discount rate shocks to asset values. We show that an upward shift in cross-country one-period return correlations resulting from correlated cash flow shocks increases the risk of global portfolios and reduces investors' willingness to hold risky assets at all horizons. However, a similar upward shift in cross-country one-period return correlations resulting from correlated discount rate shocks has a much more muted effect on long-run portfolio risk and on the willingness of long horizon investors to hold risky assets. Correlated cash flow shocks imply that markets tend to move together at all horizons, thus reducing the scope for global diversification for all investors regardless of their investment horizon. By contrast, correlated discount rate shocks imply that markets tend to move together only transitorily, and long-horizon investors can still benefit from global portfolios to diversify long-term cash flow risk. We document a secular increase in the cross-country correlations of stock and government bond returns since the late 1990s. We show that for global equities this increase has been driven primarily by increased cross-country correlations of discount rate shocks, or global capital markets integration, while for bonds it has been driven by both global capital markets integration and increased cross-country correlations of inflation shocks that determine the real cash flows of nominal government bonds. Therefore, despite the significant increase in the short-run correlation of global equity markets, the benefits from global equity portfolio diversification have not declined nearly as much for long-horizon investors as they have for short-horizon investors. By contrast, increased correlation of inflation across markets implies that the benefits of global bond portfolio diversification have declined for long-only bond investors at all horizons. However, it also means that the scope for hedging liabilities using global bonds has increased, benefiting investors with long-dated liabilities. Finally, we show that the well documented negative stock-bond correlation in the U.S. since the late 1990s is a global phenomenon, suggesting that the benefits of stock-bond diversification have increased in all developed markets.