Should You Invest In Emerging Markets?

Emerging markets have remained a popular investment area since their introduction in the early 2000s. Since then, a number of new funds and tools for investing in emerging markets have been introduced. Emerging markets are a unique investment opportunity because they offer equal parts of risk and reward. While there are huge gains awaiting investors that can identify the right emerging market investment at the right time, the risks involved are sometimes not well understood.

What Are Emerging Markets?

Emerging markets describe economies that exist between the stages of developing and developed. The emerging-market phase occurs when economies see their most rapid growth, as well as their greatest volatility.

In 2021, current emerging market economies include India, Mexico, Russia, Pakistan, and Saudi Arabia. When identifying emerging markets, investors and economists are looking for countries where there is very little political or social unrest and consistent economic growth.

Risks of Investing in Emerging Markets

Investing too late in an emerging market is the biggest risk of this type of investment. China is a good example of an economy that was previously considered an emerging market. However, by the time that the majority of people became aware of the growth of the Chinese economy, it was already well on its way to becoming an economic powerhouse. At the height of an emerging market's popularity, investing can be very costly. In addition, the growth of emerging markets isn't steady and they can be very volatile, so the timing of an investment is very important.

The process of emerging into a developed economy isn't always an upward trajectory. Countries can face political upheaval or natural disasters that can seriously (and suddenly) stymie their economic growth. Unfortunately, this can cost enthusiastic investors a lot. For example, Russia has alternated between an emerging market and a developing economy since the 1990s. The aftermath of communism and poor monetary management created a massive debt default, massively devaluing Russia's currency, the ruble. For a time, the country was considered a poor investment. However, Russia has access to large amounts of oil reserves and mineral deposits, making it very likely that it will evolve into a developed country in the near future.

Rewards of Investing in Emerging Markets

When basic caution is exercised, the rewards of investing in an emerging market can outweigh the risks. Despite their volatility, the most growth and the highest-returning stocks are going to be found in the fastest-growing economies. The secret to adding growth from emerging markets to your portfolio is to limit yourself to reasonable risks. Exchange-traded funds (ETFs) are a great option because you can add an entire country or a combination of countries to your portfolio.

In addition, many U.S. blue-chip stocks offer decent exposure to emerging markets because of their global nature. For example, the revenue mix of Coca-Cola reflects the fact that it is popular in both China, Japan, the U.S. Buying blue-chip stocks or funds that invest in these stocks can add emerging market exposure with a balance of developed market stability.