Emerging markets have the potential to provide investors with outsize returns. However, they also come with higher risks. Here are some tips for navigating those risks and finding a good investment opportunity.
Emerging markets have the potential to provide investors with outsize returns.
Emerging markets have the potential to provide investors with outsize returns. The economies of these countries are growing rapidly, and they have a lot of growth potential. However, there are also greater risks involved in investing in them.
Emerging markets are often volatile and can be difficult to predict. Investors also need to be aware of these countries’ political risks and the fact that currency fluctuations may affect their portfolios.
The risks are higher as well.
You may be aware that emerging markets are riskier than developed ones. While their growth potential can be much higher, emerging markets tend to have higher volatility and political and economic uncertainty. They also have less liquidity and are more susceptible to contagion. However, these risks can be mitigated by following a few simple rules of thumb:
- Investing only in highly liquid stocks
- Buying companies with strong fundamentals (not just high P/E ratios)
- Holding onto your investments for the long term
Check out the economic data.
Economic data is a great way of checking the health of a country’s economy. You can use this information to understand what trends are happening in the economy, whether it’s growing or shrinking, and how stable it is.
Investors need to be aware of these things because they affect their portfolios’ performance. For example, if an investor buys shares in companies that operate in countries with growing economies and stable governments, but then those countries have political conflicts or economic crises (which many emerging markets do), their portfolio would be negatively affected by this change in circumstances.
There is often a lot of variability from one year to the next.
The first thing to understand about emerging markets is that there is often a lot of variability from one year to the next. One year’s performance does not predict the next year, so it’s important to look at where these markets have been and what kind of returns they’re likely to produce over time.
For example, in 2017, Russia’s stock market fell by over 25%. This can be attributed to lower oil prices and geopolitical tensions with neighboring countries like Ukraine and Syria. However, the Russian economy bounced back in 2018 with a 16% increase in stock market values due in part to improved relations with the West following Vladimir Putin’s summit with Trump earlier this year.
Before investing in emerging markets, do your homework.
Before you invest in an emerging market country, it’s important to do your homework. You should research the following areas:
- Economic data
- The political situation
- The legal system and financial system
Build a portfolio instead of putting all your eggs into one basket.
One of the most important pieces of advice you’ll ever hear as an investor is: don’t put all your eggs in one basket. If you do so and things go south, it could be a very expensive mistake.
As a result, it’s important to diversify your investments across several different asset classes (e.g., stocks, bonds) and investment strategies (e.g., passive funds). But this principle extends beyond just money management—you should also spread it out among companies.
Emerging markets are still a good bet for investors who are willing to do their homework and diversify their portfolios. As with any other investment, emerging markets can be volatile and unpredictable, but they also offer the potential for high returns when the time is right.