hi: I do not know your age or your Asset Allocation to emerging markets. In general i recommend 10-15% allocation to emerging markets. I like buying what has done poorly recently, and emerging markets fell about 20% in 2011.
Emerging markets certainly have a place in most well diversified portfolios.Your age, risk tolerance, and financial situation will dictate the proper allocation to EM. Stocks and bonds of these countries have characteristics that are unique to the emerging world and thus, many times these instruments are not highly correlated to large cap US equities. EM has done poorly of late as fears of a slowdown in China and an increase in rates in the U.S. has impacted returns. Be prepared for potential volatility in this portion of your portfolio as EM asset classes have proven to be volatile at times.
David, without knowing your particulars, I would say that you would likely be well served with an allocation to Emerging Market stocks and bonds because they represent an important diversifier to just owning stocks and bonds from developed countries like the US and the EU. Consider that China, India, Brazil, and other emerging markets are rapidly growing and ask yourself this: if those markets are experiencing rapid sustained growth, is it riskier to own them, or to miss out on them? That said, don't go haywire; you'll want to balance these investments with the rest of your portfolio, and you might want a bit more defense to offset the extra volatility. Craig Israelsen offers a great primer on how to build a properly diversified portfolio that includes Emerging Markets in his book, "7Twelve: A Diversified Investment Portfolio with a Plan", which you can find on Amazon. You may want additional "Defense" depending on your age and circumstances, but this book is a good place to start.
I agree with my peers that without knowing your individual situation and particulars recommending a certain allocation to a certain asset class does not make any sense. However, to give you an idea of how much you can invest in the Emerging Markets equity category, you should look at the MSCI All Country World Index, which maps out the global equities generally. It's allocation is roughly 45% U.S. Equities, 45% International Developed Equities and 10% Emerging Markets. So you can use this as your guide on how much of your total equity allocation you can invest in Emerging Markets without making a bet.
Now given that Emerging Markets are trading cheaper compared to their trailing and future valuation metrics, you can make a conscious decision to over weight Emerging Market equities and say you want to hold 20-25% of your equity allocation with Emerging Markets equities. This could also stem from the fact that over the next 5-10 years, Emerging Markets will experience a higher economic growth rate than the developed markets.
Hope this helps shed more light to all the other valuable suggestions.
Prateek Mehrotra Chief Investment Officer Endowment Wealth Management, Inc.
Another factor to consider is the total amount of debt held by the developed world. All debt is not the same, clearly some can be used strategically and to invest in the future growth of a nation. However, when a large percentage of debt is derived from non-investment related spending (think US, Japan, Europe) then you have a situation where future growth will become constrained by debt (especially if interest rates revert to historical levels). Emerging economies, while still linked to the developed world, do not have the tremendous debt burden seen elsewhere. Sure, they have their own issues to consider. However, if you have the risk tolerance and timeframe necessary I think your prospects for long-term growth from emerging economies is more likely than growth to come from the developed world. Fortunately there are many securities that give you access to all or specific developing economies for a reasonable cost. I would encourage you to spend some time getting familiar with the options. I think it will be time well spent.
Following the crowd and investing in unfamiliar areas is not a sound investment strategy. You're much more likely to make money over the long term by focusing on investing in assets that you understand and are comfortable with. Invest in what you know, even if that means that you're slightly less diversified. Modulate your risk by holding excess cash. And always pay attention to valuation.
About 50% of the world's stock market capitalization is outside the USA. Why would you invest the majority of your money into just one part of the world? The philosophy I employ with my clients is to invest around the world in proportion to the market capitalization of each individual country. Sounds hard to do but it actually quite easy. The Vanguard Total World Stock Market Index Fund ETF (Ticker VT) can go this for you and give you not just emerging market exposure but world exposure.