Many retirees avoid investing in emerging markets, given their potential volatility, but a small allocation to increase your growth potential may be appropriate.
Also known as developing markets, well-known emerging markets include Brazil, India, Mexico, Pakistan, Russia, Saudi Arabia and many others. These markets may sound exotic, but emerging markets are not necessarily the significantly underdeveloped mysteries they used to be. In fact, some are economic powerhouses, such as China.
Why consider emerging markets?
First, investing in emerging markets can provide growth potential as they transition from industrial economies to digital economies. Many emerging markets have a high number of graduates in technology fields, significant venture capital funding and policy support for innovation (such as tax credits).
Second, emerging markets may also offer diversification, which means that emerging market stocks may perform well when developed market stocks are performing poorly. This is always a good thing to have in your portfolio.
But emerging markets are not appropriate for all investors. There are risks. The main risk is volatility: any political or currency-related crisis in an emerging market could cause its stocks to decline. Another concern is the potential impact of U.S. interest rate hikes, which can lead to a stronger U.S. dollar and may lead emerging markets to underperform. Those investors who are in or near retirement may not be able to tolerate these fluctuations. So, before investing in emerging markets, it is a good idea to be sure you understand the risks and are comfortable with them.
But if you understand the risks and would like the potential portfolio diversification and growth one can obtain through emerging markets, it might be worth a conversation with us. We can point you in the right direction, given your individual financial circumstances and goals. Please reach out today.