Emerging Markets: What Physician-Investors Need to Know

There’s no question that Emerging Markets have exciting growth and should continue to grow well into the future. At the same time, they tend to be a lot more volatile than investments in developed nations.

Are you ready to take that rollercoaster ride? This is not a market to trade, but to make long-term investments in. There is no question that their recent out-performance has made them pricy and big swings are more likely than not. If you’re much better than most at making a long-term commitment, than consider having about 20% of your foreign exposure to Emerging Markets.

For most investors, getting this exposure is not as simple as it used to be. There are now over 200 EM funds (counting multiple share classes), not including single country funds. I never recommend single country funds unless you are extremely knowledgeable and can manage single country risk. It’s not for the faint of heart, and for most, does not belong in your retirement portfolio if you are within 10 years of retirement. Although mutual funds that invest in this area have greater internal costs than ETFs, few would argue that EMs are super efficient. Most doctors are well served by using a manger’s expertise rather than using an ETF to buy an index.

If your portfolio is under $250,000, you would be best served investing in a global fund that has a strong EM exposure, rather than one that is an EM only fund.

On the other hand, if you have retirement investments over $250,000, you should have at least 30% of your international assets in emerging markets. In fact, you probably could have two positions: one that specializes in the BRIC markets (Brazil, Russia, India and China), along with either a global small company position or a diversified emerging markets fund. Also with a portfolio of this size, global bonds should be represented in your overall allocation. Funds that invest all over the global bond market and are not hedged back into US dollars give you the opportunity to hedge against a falling dollar.

Diversification is important, but remember, some of the best long-term opportunities have higher individual risk.

As long as you are at least 5 years from retirement, you should not be concerned about the investment. Volatility from any individual asset class is beneficial, as you will be buying more when that asset class is down. This is still the best way to grow your assets.

In the future, we’ll discuss approaches to take when you are near retirement and enter the “de-accumulation phase.” That is when your approach to investment needs to change.