Tips for Emerging-Market Investors

Investing in emerging markets always carries risk. And, although risk is part of any investment, you don’t want to take more risk than you need — you don’t get paid for taking stupid risks. Reduce a lot of pointless risks and avoid making expensive mistakes by using the following tips:

  • Look for listed securities: Many major emerging-market companies arrange to have their stocks and bonds traded in the world’s finance capitals, so you can invest from the comfort of your own country.

  • Build diversification across markets: Diversify your emerging-market commitment either by investing in two or more countries, regions, or currencies or investing in different vehicles — stocks and bonds, mutual funds and exchange-traded funds (ETFs), and cash and currency derivatives.

  • Find diversification within markets: One of the easiest ways to buy a diversified mix of emerging-market investments is through a mutual fund or an exchange-traded fund.

  • Diversify currencies: Diversify your portfolio’s mix of money. Diversifying across countries helps, especially if you have a mix of regions, but check to make sure that you’re not investing in currencies that are similar in trading.

  • Do company research: Do some work to make sure that you understand what the risks of a potential investment are, what the return potential is, and whether the investments suit your needs.

  • Watch suppliers and customers: Looking at a company’s relationships with its suppliers and its customers lets you know that the business is legitimate; it may point to other investment opportunities; and it can reveal interlocking relationships that you need to know about beforehand.

  • Pay attention to debt: Some governments in emerging markets need funds from outside investors to pay for the infrastructure the country needs. These bonds could be great investments. On the other hand, a company or country with too much debt may not be able to pay it back.

  • Monitor country news: If you’re investing in emerging markets, you need to turn to news sources in those markets, as well as to publications with a global focus.

  • Accept volatility: When you invest in emerging markets, you take on extra risk in the anticipation of extra return that isn’t correlated to returns in developed markets. Expect a lot of ups and downs along the way!

  • Take a long-term view: Emerging markets are all undergoing change, and change takes a long time. If you can keep your perspective on the long-term growth potential and incredible opportunities for growth and change, the near-term hassles will be smaller and easier to manage.

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