I stumbled across this article from the Hartford Courant about investing in emerging markets, writes Roger Nusbaum. I'm not exactly sure if the article is saying that emerging markets will still do well or if now is a time lighten up. If there is a conclusion there I couldn't figure it out.
I have written a lot about emerging markets. The role I think these countries can play is that they tend to have a low correlation to US markets and just a couple of holdings can add a lot of return to a diversified portfolio.
I am benchmarked to the S+P 500 which has no foreign stocks but long time readers know I have a heavy foreign exposure. Since there are no emerging markets in my benchmark it is tough to say how much would be equal weight, overweight or whatever. That being said I think for someone with reasonably normal tolerance for volatility 4% or so might make sense as an equal weight number. These days most clients have 7% or so in emerging markets.
I think picking one of the emerging market ETFs is a great way for some with a low tolerance for volatility to capture exposure. [Editor: ETFs that track emerging markets include EEM and VWO.] Most clients own one of the ETFs and anywhere from 1-3 individual stocks or perhaps one of the CEFs that invests in India. All of the stocks I own for clients in this area have dividends ranging from healthy to huge.
One catalyst to reduce, not eliminate, exposure to emerging markets would probably be if there was a clear and obvious path for very good things for the US market. As time goes on this analysis evolves.
A big focus here is the low correlation. Although these markets can be volatile, when blended with domestic stocks, the volatility of the overall portfolio can be reduced.
One goal that just about every manager says they have is market beating returns with less volatility. To my way of thinking, doing this successfully means there will always be stocks that are up and there will always be stocks that are down. If I think IBM is the best tech stock out there (just an example, I don't own IBM) and the tech sector is doing poorly I would expect IBM to be down. That does not make the name a sell. Hopefully value is added with the decision to be over, under or equal weight the sector, technology in this example.
So while the next 10% for emerging markets could be in either direction, the role that the asset class plays will not change.
The idea of focusing on the portfolio and not the individual holdings is not easy to do. A common mistake is to focus on the holdings which can lead to selling low, buying high and having a lopsided portfolio.
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