Avoid Rose-colored Glasses in Market Watch

Physician's Money Digest, March 2006, Volume 13, Issue 3

Wall Street Journal

While the rest of the developed worldshould experience a 3% growth in 2006,the International Monetary Fund predictsthat emerging-market economies will doublethat rate. A recent article maintains that there is no guaranteethat rapid economic growth will translateinto stellar stock market performance.Because the fastest growing economiesare spurred by private, entrepreneurialbusinesses and not publicly traded companies,high-growth economies may not havethe highest returns over long periods oftime. Comparing the performance of 17international markets over the past 105years, it seems that low-growth economiesexperience the greatest returns. If you hadinvested your money in the top 20% ofcountries with the highest 5-year economicgrowth rate, you would have earned thelowest returns. However, you would havehad the greatest returns if you had putyour money into the bottom 20% of countrieswith the lowest 5-year growth. Forexample, China, which has had the fastesteconomic growth, has also had the worststock market returns. While the articlemaintains that it is not forecasting inferiorreturns for emerging-market economies, itdoes caution against putting all your eggsin one basket. Earmark 25% to 30% ofyour total stock portfolio for foreign markets,with 5% to 8% for emerging markets.