Emerging market stocks, bonds, and currencies have had a tough time the last few years. Many investors don’t want them anywhere near their portfolios after the big losses. But perhaps this is the time to be adding them to your portfolio. This blog post makes the case for adding emerging market equities to your portfolio at this point. It doesn’t delve into economic fundamentals. Instead, it points out that they are better values than other options and are leading the latest market rally.
Lower returns and higher volatility. Why in the world would anyone want that?
Fair question. But investing is about the future, not the past. Simply picking the asset class with the highest recent return and lowest volatility has not generally been an effective strategy for long-term investment success.
The fact that EM has significantly underperformed the U.S. and is down over the past five years is actually a good thing for those considering diversifying into the asset class today for two reasons:
1) It means increased odds of higher prospective returns (long-term returns are highly correlated with beginning valuations which are more favorable today in EM than the U.S.), and
2) It means that EM can add diversification benefits through lower correlation (because EM does not move in lockstep with the U.S., it can be additive to a portfolio over time).