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Guarding Your Wealth for Senior Citizens
How to Chart a Course for Investment in Emerging
Markets
How you can take advantage of this opportunity
without losing your shirt
By Jeffrey D. Voudrie, CFP
 Feb. 15, 2008 - Investors dissatisfied with
domestic returns have been seeking greater growth in foreign markets.
As noted in last week’s article, the growth of emerging markets is not a
short-term fad, but a long-term trend that will affect global markets
for years to come. The question then, is how you can take advantage of
this opportunity without losing your shirt. Read on to find out.
The returns of foreign emerging markets are truly
impressive - 20% to 100% a year or more isn’t uncommon. Who wouldn’t
want to earn 83% in one year like the China index FXI did? Or the 58% it
did in 2007!
These dramatic returns have caused some investors
to throw caution to the wind. They’ve moved significant portions of
their portfolios to these markets only to suffer devastating losses.
That’s not what I want for my clients, nor do I
want it to happen to you. While the returns are much higher, the risk is
also much greater. Unless you have carefully planned how to control that
risk then you should leave these markets to the professionals.
Here’s the real question. Are you willing to endure
losses of 20-50% that can last for months in order to achieve those
stellar returns? Most are not. They jump into these markets only to get
discouraged and sell after a big decline.
The China index (FXI) is down over 30% since its
peak in October of 2007. Would you still be hanging on to it?
Daily swings of 5% to 8% are not uncommon for
large-cap Chinese stocks. Newer markets, like those in Vietnam, can take
huge dives very quickly. Governments, along with their financial
regulations, can change overnight.
Growing pains are common for developing markets and
those with the stomach to handle the wild ride can be richly rewarded.
Clearly, investors have to match their foreign exposure to their
appetite for risk.
Investing in emerging markets is not for the faint
of heart. That doesn’t mean that you shouldn’t do it. Start small by
only investing a couple of percent of your overall portfolio. Then you
need to decide the method of investing that is best for you.
There are several ways you can invest in foreign
and emerging markets. You can buy individual stocks on the foreign
exchange. You can buy foreign companies that are listed on U.S.
exchanges.
There are exchange-traded funds (ETFs) for just about every
country and/or region. There are mutual funds. You can buy bonds as well
as stocks.
I only recommend buying stocks on a foreign
exchange for advanced, sophisticated investors. This isn’t as hard as it
used to be thanks to online brokerage firms, but is still pretty
involved.
>> First, the markets like the Hong Kong exchange
are located half-way around the world. That means their market is open
while it’s nighttime here.
>> Second, you have to convert your money to the
local currency prior to making a purchase.
It’s much easier to buy large foreign companies
that trade on U.S. exchanges. Doing so isn’t any different than buying
any other U.S. stock. Some of these companies trade on the pink sheets.
If you go this route, beware of the daily trading volume and the
spread—the difference between the bid and ask price.
Good quality mutual funds are perhaps the most
popular way to invest outside the United States. There are too many
choices to list here and doing your research before you invest is
crucial.
Some have active management, while others are more passive.
Some focus on specific markets while others are more general in nature.
Fees can vary widely as well.
No matter how you invest, one major risk to
consider is currency risk. When the U.S. dollar is falling, foreign
returns benefit. When the dollar is rising, however, foreign returns
suffer. This means your return can either be wiped out or greatly
boosted, depending on what the currency markets are doing.
While the superlative performance of emerging
markets is long term trend, many tactical decisions will need to be made
along the way.
There are simply too many changes in the governments,
rules and regulations and the economies themselves to just set it and
forget it. Professional management can add significant value and help
you take full advantage of the opportunities that are available.
If you have a specific question or would like more
information, give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
I will answer your financial question FREE.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive that may not have appeared in
SeniorJournal.com.
Guarding Your Wealth for Seniors, on
SeniorJournal.com, is
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to select
private clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For bookings, email
jeff@guardingyourwealth.com.
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