Emerging Markets: Pros, Cons & How To

Stock Market

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Many investors diversify by putting a portion of assets into emerging markets. Risks are higher with emerging markets because of political risk, untested markets, and currency volatility. Investors accept the risk involved for the opportunity to see higher growth. Finding the right investment opportunities can take investigation into the emerging market.

Emerging Market Economies

Emerging markets are markets that are in the early stages of developing a stable political environment that promotes business growth. Most emerging markets are defined by a growing GDP and a young and expanding workforce. Investors can get higher returns for accepting higher volatility with emerging markets. However, this volatility can be diversified away through effective asset allocation.

Advantages of Investing in Emerging Markets

There are several advantages to investing in emerging markets that include:

  • Potential for high growth: Offer higher-than-average returns compared to other parts of their portfolio for the risk involved.

  • Diversification: Adds new investments to a portfolio, giving investors diversification that they would not see if they remained in domestic or established markets.

  • Global stewardship: Helps improve the economic standard of living in the country where the investment is made by increasing jobs and offering better income opportunities.

Disadvantages of Emerging Economies

There are several disadvantages to investing in emerging markets that include:

  • Volatility: Emerging markets tend to be more volatile, with investments seeing ups and downs.

  • Principal risk: Investing in new ventures in growing economies can lead to losing money if the underlying investment goes bankrupt.

Emerging Markets & Portfolio Diversification

Investing in emerging markets is a strategy used by investors to diversify their investment portfolios. There is a big opportunity for growth with emerging markets as new businesses launch and expand and the country’s economy improves as a whole. The middle class expands and productivity hits new highs. Depending on one’s risk tolerance and time horizon, a diversified portfolio might have as much as one-quarter of the portfolio invested in emerging markets.

Tip: Emerging markets and US markets may be on different paths of growth. One may zig when the other zags. This helps minimize the threat of volatility because the investments grow in different market conditions.

How To Invest in Emerging Markets

An investor’s overall objectives are important when considering an investment into emerging markets. The objectives should include diversification and growth and the investor should have a risk tolerance that accepts the ups and downs of emerging markets. Or the investor should be very well diversified.

There are many ways to invest in emerging markets that include buying individual stocks, mutual funds, or ETFs. Investors should look to markets where they feel that growth has not plateaued.

The steps to invest in an emerging market are:

  1. Open a brokerage account. It does not matter if the account is a retirement account or not. Any brokerage account will give you the ability to invest in an emerging market.

  2. Consider asset allocation. Determine how much of your portfolio you want in an emerging market. Look at other investments that you have and figure out how much of a threat investing in emerging markets is for you.

  3. Fund the account. Put the money you wish to invest in an emerging market into the brokerage account.

  4. Choose the investment. Do the research on the region and companies that you want to invest in. This might include reading through mutual fund prospectus or researching the country’s GDP and primary companies.

  5. Purchase the investment. After you’ve made the investment selection, it’s time to purchase it with the money you put into the account.

Tip: Make a list of emerging market opportunities by looking at where major US companies invest resources. It’s a good sign if a US company builds a plant or buys supplies from an emerging market.

Bottom Line

There are a lot of opportunities to invest in emerging markets. There are markets around the world that are actively growing and building a bigger industrial infrastructure. Investors can take advantage of the growth of these markets with stocks, bonds, mutual funds, or ETFs that focus on specific markets. Investors should do their own due diligence before investing in any emerging market.

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