Should You Invest In Emerging Markets?

What is an emerging market, and should you invest in this sector? Webster's dictionary describes emerging as "newly created or noticed and growing in strength or popularity, becoming widely known or established." Sounds good, but what does it have to do with investing? Plenty.

Most investors invest in established or developed markets like the United States, United Kingdom, Germany, Japan, Australia, and Canada. Established markets have contract law, stable governments, and modern infrastructures.

Emerging markets include Brazil, Russia, India, and China. Other countries include Peru, Thailand, South Africa, Chile, and Turkey. These markets typically have large populations, abundant natural resources, and volatile governments. However, investing in Russia is not an option because of the Ukraine war. Nor is China because of the way they treat publicly traded companies. It's not a significant loss as they account for less than 4% of the global equity market capitalization.

Why should you invest in an emerging market? These markets are growing, and the middle class is expanding, giving people access to things we take for granted, like microwaves, washers, dryers, and iPhones. Technology is making our world smaller and more affluent. As these markets prosper, so will their citizens. 

How much money should you allocate to emerging markets? I recommend a 5% allocation. Since 1998, the MSCI Emerging Markets Index has produced an average annual return of 9.42%, similar to the S&P 500 return of 10.67%. But over the past five years, Emerging Markets have lost .29% yearly; over the past ten years, they've averaged 2.27%, significantly underperforming our markets. The last significant run for emerging markets occurred from 2003 to 2007, jumping 159%, averaging 37.5% annually.

It's best to buy an index fund rather than trying to pick individual countries because of the volatility. For example, Turkey soared 90.4% last year but lost 28.5% in 2021, 41.4% in 2018, and 32% in 2015: feast or famine.

Here is a chart of a few emerging market funds.

As you construct your portfolio, add a pinch of emerging markets; it could boost your portfolio's returns. Investing in emerging markets can be rewarding but carry higher risks, such as political instability, regulatory uncertainties, and currency fluctuations. Regardless, they can provide tremendous long-term investment opportunities.  

It's a small world, but I wouldn't want to paint it. ~ Steven Wright.

June 9, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your asset level.

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