How to Maximize Opportunities and Manage Risks in Emerging Markets
Emerging markets have amazing opportunities for investors to make money and maybe even change the world. That’s all good stuff. But they also have some risks that you may not have considered.
The secret is that there is no secret. Do your homework, use advisors knowledgeable about the markets that you’re considering, and diversify.
Do your homework
Doing careful research can help you better identify your sources of risk and return, which in turn can help you better understand when — and how much — to buy and sell. Doing your homework starts with a good understanding of the country and the industry that you’re investing in.
When you start your research into the country and industry, look for the obvious opportunities and risks. Who runs the government? Is the government committed to development? Who competes for customers and funds with the investment that you’re considering? These basic questions are essential — investors throughout history have lost money because they overlooked the obvious.
The next step is looking at the financials of the investment that you’re considering. How will it make money? How much funding will it need to grow?
Research is an ongoing process. You need to keep it up to see if situations have changed. Maybe you want to commit more money to a market or investment, or maybe you want to cut back. The more you know, the better decisions you can make.
Use intermediaries or advisors
Emerging markets are probably far from where you live and don’t show up in the news very often. To get around this lack of information, you may want to use an intermediary to help you. The most popular intermediaries are emerging-market mutual funds and exchange-traded funds (ETFs) that pool money from many different investors. The fund managers are people who concentrate on emerging markets and have access to research and travel budgets that you may not have. Their job is to find investment opportunities and assess risks in order to make money for their clients, so they can devote more time and effort than you may be able to on your own.
If you have a great deal of money to invest, you can work with a private investment fund or a wealth manager with a specialty in emerging markets. Some brokers, wealth mangers, and other financial advisors have a specialty in emerging markets.
Diversify your investments
In any market, the easiest way to improve your long-term return and manage your risk is to diversify by buying different investments with different risk and return characteristics, such as stocks and bonds. If you limit your emerging-market investments to the long-term, risk-bearing part of your portfolio, and if you invest in a range of countries and industries, your overall risk is greatly reduced because you have the rest of your portfolio in less-risky, more-liquid assets.
When you diversify, don’t just go after a grab bag. Instead, look at a mix of emerging markets. They range from almost developed to barely modern, from natural-resources economies to technology-driven economies, from hard currencies to those that are difficult to exchange. If you have exposure to a little bit of each, then the unique risks in any given market will be offset by unique advantages in others.