How Much Should You Invest in Emerging Market Stocks?
Emerging markets are markets outside of the major markets of the United States, Western Europe and Japan. The most-well-known emerging markets are the BRIC nations of Brazil, Russia, India and China. Investments in emerging-market stocks should be part of an overall asset diversification strategy. However, there is no fixed rule on how much of your investment portfolio should be in emerging-market stocks or in any other asset category.
Other People Are Reading
-
Basics
-
In addition to the BRIC nations, other prominent emerging nations include Mexico, South Korea and Turkey, wrote Chester Dawson in a December 2005 "Bloomberg Businessweek" article. Pick a region and study the population, government and main exports to understand the market dynamics there. This should be the first step in selecting emerging-market stocks, according to a September 2011 NASDAQ website article by Becca Lipman. Each region is different, and countries within a region are different. For example, Pakistan and Bangladesh are neighbors of India, but the investment climates in these three countries are not the same.
Existing Investments
-
You can be invested in emerging markets either directly or indirectly. You may hold stocks in U.S. multinationals that derive significant revenues and profits from operations in emerging nations. You may hold international mutual funds, which usually have a certain percentage of their assets in emerging markets. For example, if you hold 10 percent of your portfolio in international mutual funds, which invest on average 10 percent of their assets in emerging markets, then your current exposure is 1 percent (100 x 0.10 x 0.10). Assess your planning horizon, risk tolerance and time available for nvestment research to determine whether you need to adjust your current emerging-market exposure. Emerging market investments are generally viewed as riskier, but they provide stronger returns at certain times.
-
Planning Horizon
-
Your financial planning horizon affects the asset mix, including the proportion of emerging-market stocks. If you are planning to retire soon, your portfolio may contain liquid and low-risk assets because you will need steady income and quick access to cash for your retirement needs. If you are not planning to retire for several years, your portfolio may contain more growth-oriented stocks, such as emerging-market stocks. For example, if your target portfolio asset mix is 50-50 for stocks and bonds, you could allocate the stock portion equally to U.S., European and emerging-market stocks, meaning your emerging-market stocks are about 16.5 percent of the portfolio (100 x 0.50 x 0.33).
Risk Tolerance
-
Emerging markets may offer higher returns but they also carry greater risk in terms of political stability, inflation, currency fluctuation and other factors. Dawson suggests that liquidity is also a major concern because there might not be enough investor demand for there to be an efficient market in a particular place. You could invest in exchange-traded funds or index funds that specialize in emerging markets, which would provide professional money management at a relatively low cost.
Time Availability
-
Stock research takes time, especially for emerging-market stocks that may have fewer information sources. Mutual funds and investment banks employ professional money managers and analysts who devote the time necessary to research emerging-market stocks. Senior Morningstar analyst William Samuel Rocco told reporter Ben Baden in a January 2011 "U.S. News & World Report" article that a broad-based, actively managed mutual fund could give you both emerging-market exposure and portfolio diversification.
-
