Emerging markets are countries that are becoming more globally engaged as they develop. Right now, some of those emerging markets include India, Russia, China, Mexico, Pakistan, Saudi Arabia, and Brazil.
Some investors are hesitant to include these markets in their portfolios because of global tensions and market uncertainty. Over the past 10 years, emerging markets have trailed behind the S&P 500, but it’s unlikely that will always be the case. It’s important to diversify outside of US markets in case the US growth rate slows down. Overall, there is a great deal of potential in those economies, and investing in them can be a boon for your portfolio.
What are emerging markets?
Currently, emerging markets make up about 12 percent of global market capitalization. That’s a pretty significant share of the market, so it makes sense to include them in a diversified portfolio.
The true value in emerging markets is their potential for growth. Each of these countries has strong, growing companies and people who are moving out of poverty and accessing more wealth. Ignoring these economies means cutting your portfolio off from that growth potential.
With the understanding that this asset class can have greater growth potential, you will want to place these index funds in accounts that would limit the amount of tax drag on your portfolio, like Roth IRA accounts. Check out my post on asset allocations for more information on that.
Investing in Emerging Markets – What are the risks?
I believe that emerging markets can be a valuable component of a diversified portfolio. However, they do present some challenges.
First, returns can vary widely. If you look at what has happened in Russia and China this year, you can see that political issues can play a major role in returns.
Second, there is a lot of unpredictability at play. One country might have yielded high returns last year but low returns this year. Again, that’s where diversification comes in. Include a variety of countries in your portfolio to hedge against those risks.
And third, there are a variety of factors to think about before you invest. It’s not as simple as just deciding to invest in emerging markets. You’ll want to do your research and look at things like market size, how much debt a company has, and restrictions on foreign investors.
Investing in these markets creates more risk in your portfolio, but it can also provide greater returns. With higher growth rates and population increases, there is greater potential for growth in these countries. Ultimately, you’ll want to approach your emerging market investments with flexibility, and be prepared to make changes.
The bottom line
Emerging markets can be a valuable part of a globally diverse portfolio. Look for the opportunities and potential in an economy, and be open to making changes when necessary.
Do you need help planning for your financial future? Contact me today to set up a meeting to talk about your goals.