International investing is considered a good way to diversify a portfolio. Emerging markets are just one piece to the world economy. Adding them to your portfolio can increase your overall return.
What are emerging markets? They are countries that are developing. Their political policies and infrastructure are evolving. They are establishing their economies and participating in creating their own stock markets. These countries are growing larger and, hopefully, stronger.
A good analogy would be to compare an emerging market country to a small company stock. Small companies have grown big enough to offer stock. They are growing rapidly to develop more market share. A large company is well-established and has market dominance. They will grow more slowly.
Think of China as a small company stock versus the United States as a large company stock. China is a big country, but they are only now establishing their economy as integral to the world. The United States has been dominant for decades.
China, Brazil, Russia, and India are the most popular and largest emerging markets. Some other countries include Taiwan, Turkey, Mexico, and South Africa. Emerging market countries include very small to very large countries.
One risk with emerging markets is that they may not continue developing. Countries can reverse their progress due to factors such as natural disaster, war, and political upheaval. Their progress can reverse. This has a negative effect on stocks of the affected country causing investment losses.
Emerging market economies offer both high return and lots of volatility. These countries' economies are going through rapid change as they try to establish their economic programs and policies. This can make for a bumpy ride. But a small portion added to a diversified portfolio actually reduces the portfolio's risk. This is because emerging markets tend to be non-correlated to other stock markets. China may be the exception as the world reacts to how well its economy is doing. Even then the Chinese market performs differently than other countries.
An easy way to invest in emerging markets is to buy an emerging market exchange-traded fund (ETF). ETFs are well-diversified with stocks from a variety of countries. They are low-cost. You will still encounter market, country, and currency risk, but the diversification of an ETF minimizes these risks. ETFs can be purchased through a brokerage account such as ETRADE or through the investment firm that is selling the ETF.
It is worth considering adding emerging markets to a portfolio. You only need a small allotment. Just remember the world economy is large. The United States, or your home country, only accounts for a small portion of that world economy.
Full disclosure – I am invested in an emerging markets ETF.
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Investing $10K in 2014 (Sandra's Investing Basics)