Why you should Invest in Emerging Markets

The importance of investing in emerging markets can’t be ignored anymore. “Don’t put all your eggs in one basket” is a popular saying and likely the most important investment rule. Diversification is one of the keys to successful investing because it lowers the risk of your investment portfolio by spreading in different markets.

Everyone wants to reach the highest returns on their investments and most analysts advises to invest between 5% and 10% of your invested money in emerging markets, dependent of your investment profile and your risk tolerance. The term “emerging market” was as first used in 1986 by Antoine Van Agtmael of the International Finance Corporation of the World Bank. Emerging markets represent developing countries in fast growing economies, for example China, Mexico, Malaysia, India, Russia, Thailand, the Philippines, Brazil, Egypt and many other countries in Latin America, Asia and Africa.

The reason why you should invest in emerging markets can be declared through the high potential these markets have to grow. The labor costs in these countries are low and the demand of materials, for example oil, uranium, tea, coffee, rice etc. is very high. These two reasons are likely the most important reasons why emerging markets have a higher potential to grow than other markets.

The downside of investing in emerging markets is the high risk factor of these markets. The political, social and economic uncertainty causes that these markets are volatile. These markets have also higher levels of inflation and causes that money loses value. There is also a higher risk of devaluation of the currency in countries of emerging markets. Returns can be high but if there is a devaluation of the currency, your profit can turn into a loss.

You can invest in stocks, bonds and mutual funds of emerging markets. You may find several bonds in emerging markets which offer interest rates of more than 10% but you need to be careful because the value of their currency can cause you lose almost all your profit and even lose money. It is likely better to buy emergency bond funds which invest in several countries. Diversification is always important if you invest and even more if you invest in emerging markets.

Picking stocks of emerging markets is a difficult job. The demand of oil can be high in emerging markets and you can also investigate which countries offer the best opportunities but you need to be aware that not all companies are solvable. You also need to ensure you don’t buy when prices are overvalued. Investing in stocks of emerging markets is really complicated and has more risk than traditional markets.

It is maybe best to invest in mutual funds of emerging markets. It is already possible to invest with one mutual in emerging markets in several countries or you can spread your risk in different sectors of emerging markets of one country, for example China Funds, India Funds, Indonesia funds, Russia funds, Latin America Funds, Europe Emerging market funds, World Emerging Market Funds. Almost every bank sells mutual funds in emerging markets and you best compare returns of the last 5 and 10 years to have an idea of the performance of the past. You need to keep in mind returns of the past are no security for the future.

It is always best to read newspapers, financial magazines which inform about the sectors and even companies of their activities, profits, developments in their sector and all kind of information which can be useful to decide which stocks, bonds or mutual funds have most chances to grow. Investing in emerging markets is often a good idea but you may never invest all your money in these markets because the risk is too high. You best limit your investment in emerging markets between 5% and 10%, conform the risk you can afford. It is also important to know that these markets don’t always follow the same trend as traditional markets. It is possible they keep growing in a bear market.

Investing in emerging markets can help you to recuperate losses you made in traditional markets. The low labor costs in emerging markets and the high demand of materials will increase the profit of companies in traditional markets. You need to be aware a time horizon of at least 10 years is necessary.

The key to wisely choose your stocks, bonds or mutual funds in emerging markets is learning the economic climate, the potential of the developed markets and following the political climate. It is often best to invest in these markets which recently entered a new stage of development. Investing in emerging markets is an opportunity you may not want to miss, and can help you to reach high returns on your investment portfolio. It is either always best to spread your investments in time, or best to choose systematic investment plans to avoid always buying at peak price.