Remember the PIIGS? This happened when Italy, Ireland, Greece, Spain and more were all going to sink as the result of the global market. The truth is however that they didn’t sink at all. Douglas Boneparth is the present of the financial advisory firm known as Bone Fide Wealth. He is also a member of the CNBC council. The PIIGS are just one example of what they expected from a broader contagion and this is the very first time that EM has actually bitten some of the investors. He has also come out to say that the volatility of the current market doesn’t get to him at all and that this is because when you measure the market from its highest high to its lowest low, you will soon see that this is a mistake and this is a case of looking at short-term thinking VS long-term discipline.
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Younger investors who have 100% equities should easily have 10% in the emerging profile. They should also do everything they can to try and maintain their exposure. Even investors fall prey to retirement and they have 40-60% of equities weighting. This means that they should have an EM that is around 4-7%. At the end of the day, if you are a long-term global investor and you are young so you contribute to the portfolio, and if the dollars are averaging in then there is absolutely nothing to worry about. Emotional investors happen to make the worst decisions and this can cause major issues later down the line.
Mishra has stated that investors have EM exposure and that they should be more than prepared for volatility. Most developing countries have much better economic fundamentals and this is especially the case when you look at the account surplus. When you look at the strong Forex reserves and even the regulated system you will see that you won’t get a replay of the crisis that happened in 1997.
So it’s also important to know that stock market returns from the EM are also very lumpy. Ben Carlson who helps to manage portfolios for various institutions over at Ritholtz Wealth has written a blog. This makes the point that any type of short-term performance can easily fool investors and that emerging markets are the ideal example of this. The 10 year annual returns on the MSCI markets were just under 2%. The 15 year returns were 12% however. So how is this possible? The returns from 2003-2007 were somewhat out of this world and they stood at 37%. This example may be extreme but it does go to show you how high some returns can be. So if you jumped in at the deep end you will see that these huge returns have had an impact on the market. If you are a holder of the EM then these 10 years have been somewhat challenging. The bull market returns have kicked things off now more than ever and they have helped to make the sideways market environment that soon followed. Carlson also wrote an explanation to explain why it is so lumpy.
He stated that at the end of the day, you can win any argument with the market by changing your end date and your start date. If you had the worst possible scenario then that doesn’t mean that it will damage your returns, but this is only the case if you are able to look at things over the long-term. On top of that, trying to time the market is the worst thing that you can do but if you can try to rebalance it then this will work wonders for you. A lot of investors show very little ability when it comes to getting out of the market at the right time. If you are an asset and if you have that being down as volatile then this will be bad for emerging markets. That means that any decisions that you make have an even higher chance of being bad ones. Advisors have come out to say that the right decision at a time like this would be for you to look at the asset allocation and to also try and rebalance it as required. When you look at the gains from the recent years and when you look at the overseas assets you will soon see that investors saw a target and they wanted to achieve it through EM. They also wanted to go way above for what they wanted in terms of risk tolerance.
Goldberg has come out to say that it is so important that you don’t throw away any exposure in terms of EM equities. He has also stated that this is not the first and it is not the last time that there will be a shock to the market. He has however added that so many people get caught with far too much in the emerging market after a period of time. This is especially the case if they have done well. So he says that you should not try and get out, but you should try and make sure that you try and rebalance everything as much as you can. Boneparty has stated that if EM stock prices were to come down quite a lot then the right thing to do would be for you to buy it to bring everything down to a target weight. Investors should try and pair the long-view of EM with a much broader and long-term view on the investing that they have.
Goldberg believes that this is how you play any asset class. EM seems to be doing more of taking the stairs and then taking the escalator down. He has stated that it does take a long time to make money from them and when everything is done, it can take a long time for things to disappear. He has also come out to say that the overriding trend that helps to make emerging markets even stronger is yet to change. The billions of people who are entering the middle class for the very first time is changing and if you look at the EM you will find that shocks are not even noticeable.
Even the most experienced investors have stated that investors don’t need to have stocks in the US markets. They have also put their argument against the fact that companies are always having an increased level of exposure and even revenue in any emerging markets. This is in fact a double-edged sword and it implies that US stocks are much riskier than what people realise. Other billionaires go to cash in as soon as they think that they have seen a crisis and they do this to try and prevent the wealth that they do have from dropping. Investors who are in the long-term market however should be able to generate enough of a financial cushion for their own future. The reasoning for financial advisors has come to the conclusion that EM should be a part of every portfolio but this is not always the case.