Emerging Markets Primer

I've often written about the importance of diversifying your investments with international equities. There can be a tendency to have home bias because the companies or funds are more familiar and psychologically feel closer. Broadly speaking from the US perspective, international investments should include holdings from a variety of countries around the world. You can think of emerging markets as an important sub-set of the broader international scope even though in the investing world they're in their own category.

The term "emerging market" is to be taken literally -- it refers to countries whose business and social environments are in a dynamic state characterized by rapid growth and industrialization. Currently these include but are not limited to Brazil, Mexico, China, India, Russia and Eastern Europe and South Africa. In comparison, purely international funds might hold Western Europe, Japan, Canada and other more established countries.

Emerging markets tend to have higher highs and lower lows -- more volatility, given the rate of change and the fact that it can be more difficult to acquire market information. This means that for investors who may see phenomenal growth or big declines in one year, there might be a tendency to either overweight or avoid emerging markets all together depending on the market direction.

As with any investment strategy, attempting to chase returns is risky business. I recommend a buy-and-hold strategy of about 10-15% of overall holdings in emerging markets so that you have a balance. And of course since it's me, I prefer index funds given low overhead and other costs. MSCI's EEM is a particular favorite.