Emerging, or developing, markets are those that are transitioning into industrialized societies (many countries in Asia fall into this category). They are the ones that have economies that are starting to take off, and their industries are seeing rapid growth. Investing in emerging markets means that the investor is taking on some more risk, but they are also able to see fantastic rates of return. All investments carry some risk; emerging markets often will carry a little bit more. These are industries that are just getting started in a country or location that has never seen them before. So in addition to the risk of being a new business, they also have cultural pressures. If the culture rejects the products or services, the business will not last. Too often, the government in the area puts unnecessary pressure on these companies as well. They may not like their ideals, and the company will eventually fold because of the negative pressure. When these companies do survive, they often take off and are very successful.
Developed markets are those that already have established systems in place. Most of the countries in Europe, as well as the US, are considered developed. An investor putting money into developed markets will see less of that explosive growth that is found in the emerging markets, but he will also have safer investments. This part of the portfolio will capture different markets than its riskier counterpart, and help with the geographic diversification. The companies being invested in are usually more established and have a better track record of success.
While diversification and potentially better returns on investment are one reason to invest in international funds, another is the social aspect of it. Many of the emerging markets are in poorer countries. By investing in funds that are domiciled in these countries, the investor is helping to support an economy that would otherwise provide less than desirable living conditions.
All portfolios should encompass some investments from overseas. It is an easy way to spread the risk out around the world so if one economy declines, the portfolio still has investments in areas that have not taken a hit. Those with a higher risk tolerance will want to incorporate more international, those who are becoming more conservative simply use less. These investments do not have to be entirely in equities either. There are many great international funds that are in bonds. And don’t be confused, an international fund is not the same as a world fund. International means that the investments are outside of the US; world means the investments can be anywhere in the world.
Do you include international funds in your investing portfolio?
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