Emerging Markets Should Be a Piece of Every Portfolio


Emerging Markets Should Be a Piece of Every Portfolio

No matter your risk tolerance and time horizon, you should look to invest a bit in developing nations and take advantage of the growth potential.


A lot of investors get nervous when talk turns to putting money into emerging markets.

So do a lot of advisers.

Nearly all investments come with some risk, but the emerging-market funds have more anxious moments than most. Volatility will always be a part of investing in countries that grow and change in irregular bursts, with ups and downs, booms and busts.

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But if you're wondering if you should have these investments in your portfolio, for most investors, the answer is yes, yes, yes. Typically, to have a prudent portfolio designed to grow in good times and bad, and to be truly diversified, you need to devote some percentage to emerging markets.

When it comes to growing your money, it isn't about picking hot stocks. It isn't trying to time the market. It's all about asset allocation and building a diversified portfolio.


What should that portfolio look like? It depends on the investor. It depends on how much risk you're willing to take. Let's think of it this way: What size roller coaster do you want to be on?

Do you want to be on the big roller coaster with your teeth clenched and your knuckles white because you're hanging on for dear life? Or should we put you on the medium ride, where you get a thrill but you're not feeling nauseous? Maybe you're best off on the kiddie ride, where there's only one hill; it's fun, but there's no queasy stomach.

There's a portfolio suited to each of these personalities—and emerging markets could fit into any one.

If you're wondering why you would want to invest in something so potentially nerve-wracking—particularly if you're near or in retirement, when everyone is telling you to just say no to volatility—let's take a look at this year. Through September 30, the MSCI Emerging Markets index was up 16.6%. That's the highest growth rate out of any index so far in 2016. Standard & Poor's 500-stock index was up only 7.8% during the same period.


Now, some folks might say, "Yeah, but it was down last year." And it was. Last year, that same index lost 14.6%. In 2014, it was basically flat. But in 2012, it was up 19.2%. And get this: In 2009, coming off financial Armageddon, the worst stock market in history, that index was up 78.5%.

Of course, you have to be very, very selective depending on what your age is; what the time horizon is before you'll need the money (that's critical); and last but not least, your risk tolerance. How much can you take before you cry uncle?

In an aggressive portfolio that's all in the market, you probably would limit yourself to about 7% in emerging markets. That's still a relatively small piece of the pie—and you would divide that piece into even thinner slivers, with small-cap emerging markets, value stocks in emerging markets and traditional large-cap emerging markets.

If it's a growth portfolio—you're an investor who is more comfortable with something like 75% of your money in the market—you're still going to put emerging markets in there, but probably capped at about 5%. And again, you'd blend and split it up among different size companies in the emerging-market asset class.


If you're a more moderate investor, you want to be balanced, so you'll want to consider having about 3% in emerging markets.

No matter which ride you get on, it's important to remember that once you're in, you're in. I'm not talking about buy and hold, but buy and rebalance. You just can't sell in a panic.

When performance is down, remember you included that emerging-market fund in your portfolio because of the opportunity for growth over the long run.

And that's what retirement is all about—the long run. It isn't about the next week, the next month, the next quarter, the next year.


It's about the next 10, 15, 20 or 30 years.

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Mark A. Lloyd is the principal owner of The Lloyd Group Inc. He is the host of the nationally syndicated "Financial Symphony" radio show. He is an Investment Adviser Representative and an insurance professional.

Kim Franke-Folstad contributed to this article.

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