Diversified portfolios are critical to long-term investment success. This is because a well-thought-out strategy can help investors get consistent returns. It can reduce the overall portfolio risk.
However, for diversification, it is more than adding different asset classes to the portfolio. Investors need a balanced and diversified approach. This need goes far beyond simply putting income-generating securities into stock portfolios.
This is because a properly diversified portfolio will not expose investors to different asset classes. It provides geographical diversity through exposure to emerging market (EM) economies. This can ease the type of risk that investors have for certain types of macroeconomic events affecting all asset classes at the same time.
But not everyone agrees. Some investment advisers condemned the demand for emerging markets. They believe that emerging markets rely heavily on advanced economies. This dependence means that emerging market economies reflect fluctuations in developed countries. But they do so in weak political and social contracts. This makes them less suitable for conservative investors.
However, these consultants lack an important point. This is not the case in the past. You see, emerging market economies have entered a new era. They are now the masters of their own destiny.
This is very different from the commodity-based days of emerging markets. This makes emerging markets dependent on exports to developed countries. Today, many emerging market countries operate as self-sufficient consumer economies, which means that trade with other countries is icing on their economies. The era in which developing countries rely solely on developed countries to support their economies is over.
But even so, the same is true of emerging markets.
Rising middle class
An interesting feature of emerging markets is the growth of the middle class. The McKinsey Global Institute says that by 2025, more than 4.2 billion consumers will enter emerging market economies.
Euromonitor International estimates that 90% of the global population in emerging market and developing countries is under 30 years of age. Africa and the Middle East lead. By 2025, increasing enthusiasm, social relevance, and rich individuals will drive consumer spending to more than $30 trillion. By 2050, these figures will more than double.
These statistics reinforce the World Bank’s data, and it is expected that the real growth rate of developed economies will be only 1.6%. However, the World Bank expects that the growth rate of emerging market economies will more than double during the same period.
This is not a small fact. As you can see from these data, it is inferred that the GDP of the E7 countries will be double the GDP of the G7 economies by 2050. And get this result: Six of the seven major economies on earth will be part of E7.
However, this does not mean that investors can invest in emerging markets in the traditional way.
Avoid top-down emerging markets
Traditionally, investors have invested in emerging markets by buying indices of large corporate and institutional stocks. But this method will bring poor prospects.
Investors must focus on specific industries and companies that drive the return on investment in these developing economies. Investors who identify the long-term and long-term opportunities in emerging market economies will receive huge returns. This is especially true for investors who have a long time horizon.
But there is an important concept to keep in mind. Investors must focus on companies that benefit from the growing technology, consumer spending and infrastructure spending of emerging markets. These are the areas that are most likely to benefit.
Make EM Investment Easier
There is also an option for investors who have no time or inclination to actively manage emerging market portfolios.
Vanguard Emviral stock index fund Admiral (Nasdaq: VEMAX) provides investors with a low-cost way to obtain equity investments in emerging markets. The fund invests in company stocks located in emerging markets around the world such as Brazil, Russia, India, Taiwan and China.
The pre-tax return of the fund in 2017 was as high as 31.4% and profit after tax was 25.2%. Most importantly, VEMAX completed these returns fairly cheaply. The fund is a short position fund with a fee rate of 0.14%. In contrast, the average is 1.29% – VEMAX is much cheaper than similar products.
But this is not the only way VEMAX beats its peers. You see, in the five-year 0.96 beta, the fund’s assumed volatility is more unstable than the entire market. Compared with other emerging market funds, VEMAX’s volatility is reduced by more than 30%, making it easier to fall asleep at night.
Emerging markets will provide a powerful engine for global growth engines in the coming decades. This is a compelling long-term opportunity for investors. However, opportunities are accompanied by the need to mitigate risks by avoiding traditional emerging market investment techniques.