Emerging market investing isn't a luxury, it turns out.
It's a necessity.
After all, the U.S. isn't the only place to invest your money, and it may not even be the best place to invest your money in certain situations.
That's where emerging markets can step in and fit your unique investing needs.
Emerging market investing can broaden your financial horizons and allow you to leverage the significant growth of countries like Brazil, India, China and Russia, and many, many more.
Here's a deeper dive into investing in emerging markets, opportunities in those markets, how to invest in them, and how to measure downside risk against upside opportunity in far-off economic markets.
Simply stated, there's money to be made investing beyond the U.S. and it's up to you to learn how to make that money and build a more balanced and diverse investment portfolio.
What Are Emerging Markets?
Emerging market countries that fit that description are, more or less, limited to the 26 countries included in the Morgan Stanley Capital International (MSCI) Index, a benchmark investment index that tracks the stock market performance of emerging market economies.
Those 26 countries in the MSCI include Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and the United Arab Emirates.
These countries don't move in economic and geopolitical lockstep, so diversifying your emerging market investments is your number one risk management move. Otherwise, the risk of excessive volatility could kneecap an emerging market investment campaign crafted with even the most care and intention.
How to Invest in Emerging Markets
What's your best path to portfolio success when investing in emerging markets? Here are several time-tested tips to maximize your foreign investing experience.
Aim For Market Size Versus Economic Potential
Larger emerging market countries have populations that are actually more sizable than the U.S., and there is investment opportunity in those numbers. For instance, look at China and India, with populations of 1.4 billion and 1.3 billion, respectively. Compare those numbers to the U.S., which has a population of 331 million, as of 2019.
The problem is that many U.S. brand-name stocks and popular funds are pushing against the ceiling in terms of investment returns, while companies in China and India are just getting started selling their products and services to a booming middle class in each country -- with hundreds of millions more consumers to target than in the U.S.
That spells opportunity and that's why starting your emerging market investment campaign in larger population emerging market countries is a good place to start.
Go Ahead and Cross Borders
Nascent investors sometimes make the mistake of focusing on a single country, like China or India. While there are good reasons for investing money in those economies (see above) you're actually missing out if you don't diversify your emerging market investments into two or more countries, for even greater diversification.
You can also diversify versus different emerging market mutual funds and ETFs, in order to get the blend of emerging market economies into your investment portfolio.
Add a Bond Element Into Your Portfolio Mix
Dig up data on younger emerging market countries that have issued bonds to borrow money to build infrastructure and pave the way for larger economies. That's a good way to target bond market opportunities in far-off lands. Countries like Panama, Malaysia and Mexico, for example, are all engaged in massive infrastructure efforts and have financed those projects with bond issues with solid interest rates.
That makes an investment in emerging market countries who look to outside investors to finance their capital spending worth a closer look for bond investors.
Take a Long View With Emerging Markets
You'll need some patience with emerging market economies that are still experiencing growing pains, especially countries like Turkey and Argentina, which placed bad bets on global foreign currency debt trends and are still paying a heavy price.
Yet other countries like India, Taiwan and Korea, among other Asian countries that have capped exposure to foreign currency-denominated debt, are better investment bets over the long haul. According to data from the Leuthold Group, emerging market stocks were trading at 11 times earnings in early 2019 compared to U.S. stocks, which traded at 17 times expected earnings.
Additionally, growth potential in emerging market economies like the ones listed above has expected gross domestic growth rates of 5% annually over the next three years, compared to around 2% for more developed countries like the U.S.
With cheaper prices and more room for growth, investments in solid emerging market countries could really pay off five to 10 years from now.
Curb Your Enthusiasm and Your Exposure
Managing investment portfolio risk is critical with emerging-market investments, so it's a good idea to limit your total emerging-market portfolio exposure to 10% to 15%.
That's especially the case if you're new to emerging markets and haven't experienced the often rough-and-tumble volatility that comes with investing in sometimes chaotic foreign countries.
By limiting exposure, you're still getting enough access to emerging market economies to make a positive difference in your portfolio, but you won't get slammed if things go underwater in emerging market countries.
Check any mutual funds or ETFs you're buying to see how much money the fund managers are steering into emerging market countries. Additionally, if you're starting out, choose the ones with minimal emerging market exposure to keep excessive risk in check.
Why Invest in Emerging Markets?
Spreading your investment risk is the number one reason (but not the only one) to invest in emerging markets.
Studies show that the more portfolio diversification you have going for you, the safer your portfolio is from serious downside losses.
Take the first decade of the 21st century, which economists tabbed as a "lost decade" for U.S. stocks.
Over that period the Standard & Poor's 500 index generated an annual return of -0.95%. Yet investors who spread their risk and poured cash into the MSCI Emerging Market Index reaped 10.1% in annualized returns over the same timetable. In 2009, when the Great Recession had the financial markets reeling, emerging markets returned 74.5% versus 28.3% for U.S. stocks.
This scenario certainly doesn't happen every decade or every year, but it does show the benefits in keeping at least some of your portfolio assets in emerging market countries where economies are growing, and where opportunities exist that aren't necessarily matched in giant economies like the U.S. or the European Union.
Thus, the idea with emerging market investing is to steer portfolio money into funds that invest in those countries, with the goal of capital appreciation, risk management, and portfolio diversification.
That's in an intriguing proposition, especially given the fact that the International Monetary Fund has stated emerging market countries comprise about 80% of total global economic growth.
The Takeaway on Investing in Emerging Markets
While there's no reason you can't do the investment research yourself, it's always a good idea to bring in a trusted stock market adviser to walk you through your emerging market portfolio options.
He or she will make sure that the key elements in any investment decision -- think risk, asset allocation, short-term versus long-term time horizons, among other issues -- are all on the table and that your best interests are met before making any big moves into emerging market countries.