One of the more common asset classes among those who have a higher risk tolerance is emerging markets investing. This sector is made up of businesses that are rapidly growing in countries that are now becoming industrialized. It captures two of the areas that often see explosive growth: new businesses and new markets. Emerging markets are primarily foreign and overseas, and often they are called developing markets.
The biggest reason people invest in companies from emerging, or developing, markets is the potential for explosive growth. While all new companies, as long as they do well, tend to grow rapidly before leveling off, putting them in developing markets will cause them to grow even faster.
While many people with a high risk tolerance will benefit from having some exposure to emerging markets, most will not want to have their entire portfolio wrapped up in them. These stocks and funds offer a great way to diversify to capture gains found throughout the world. Diversification is the best way to negate risk in a portfolio, so having some money in each asset class will help the investor to see higher returns and less volatility.
Nearly all of the emerging markets are in areas of the world where the standard of living is much less than that of the United States. A good percentage of the people that live in these areas live in poverty. When a person invests in the companies, they are helping to expand that economy and ultimately start to bring them out of poverty.
The drawback to emerging markets investing is that the investor is taking on much more risk than if he or she were to invest domestically. New companies themselves carry a lot of risk of failing within their first few years. Add that to the fact that they are in locations where the culture may look down upon their business, and the risk of losing money increases dramatically. Many of these countries also have governments that are not fully established, and they are wrought with corruption. If a company is not in line with the government’s ideals, they may put too much pressure on them until the company folds. The risk comes in many different forms, but for the investor it ultimately boils down to risk vs. reward. The more risk, the higher the potential reward.
Emerging markets investing can be a source of growth in a portfolio. They can also be a source of great losses. So the individual investor needs to understand that they will not always see outstanding double digit returns. That is not to say that these investments are not any good. They are important part of any portfolio. The key is to find good companies that have a good business model, and invest in those. For mutual fund investors Morningstar.com will point you in the right direction to a good high quality fund. Emerging Markets is a great way to capture growth.