Tips for Emerging-Market Investors - dummies

Tips for Emerging-Market Investors

By Ann C. Logue

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.