“When determining how much of your money to invest in an emerging markets fund,” says Rocco, “check to see how much of your portfolio is already invested there.” Suppose, for example, you want a 10% allocation to emerging markets. You own a foreign stock fund that invests mainly in developed markets; that fund makes up one-fifth of your portfolio. If that fund has 15% of its assets in emerging markets, you already have a 3% (15% of one-fifth) exposure to emerging markets through that fund. You could invest another 7% of your portfolio in an emerging markets fund to bring your allocation up to 10%. The experts who talked to black enterprise for this story recommend that no more than 10% of your portfolio be invested in emerging markets.
Patience is prudent. Emerging markets will probably deliver good returns over a 15- or 20-year time period because of underlying economic growth, but there may be sharp declines along the way as a result of economic crises, political instability, and other problems that developing nations can encounter. “You need a long time horizon,” Rocco says.
“I’m in for the long haul,” says Dominique Moore. “I reinvest all distributions back into the fund. I have no intention of selling. If the fund goes down, I plan to ride it out. I don’t watch over this fund too closely because checking too often doesn’t help my peace of mind.”
Slow and Steady
Rocco warns that investors should be cautious about investing in an asset class that has enjoyed as much recent success as emerging markets, because there’s a risk that you’re buying near a market top. He suggests investing gradually, using dollar-cost averaging, perhaps every month or quarter. That approach reduces the risk that you’ll invest a large sum just before prices plunge.
“There are some other ways to benefit from the expected growth of emerging markets,” says Johnson. “For example, China has more than 20% of the world’s population but has less than 15% of the world’s arable land and about 7% of its potable water supply. As emerging economies develop, the people in China and other nations will be eating more, and someone will have to feed them. That’s likely to increase demand for companies in businesses related to agriculture.”
Therefore, Johnson recommends that his clients own Van Eck Market Vectors Agribusiness ETF (MOO), an exchange-traded fund that holds stocks such as Monsanto and Deere, which provide farm-related products and services. Similarly, Johnson’s clients hold managed futures, which may deliver excellent returns if demand from emerging markets drives up commodity prices, including agricultural commodities. Rydex Managed Futures Strategy (RYHFX) is a mutual fund focusing on futures contracts. As billions of people in developing nations eat more food, drive more cars, and make more cell phone calls, you’ll want to hold some funds designed to capture the investment returns that are bound to emerge.
—Additional reporting by LaToya M. Smith
This article originally appeared in the April 2010 issue of Black Enterprise magazine.