Don't Make Emerging Markets Your Investing Blind Spot

Performance and diversification properties make them good supporting players for most portfolios.  

Adam Zoll 23.12.2013
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For many investors, the thought of investing in companies from emerging markets may provoke a sense of unease. Names like Infosys (INFY), and OAO Gazprom (OGZD) aren't exactly household names here. Yet many investors already own emerging-markets companies like these through their mutual funds and exchange-traded funds without even realizing it.

Among the most difficult aspects of investing in emerging markets is that it forces us to do something that runs counter to a cardinal rule of investing. One of the first pieces of advice many investors are given--and the wisdom dispensed by luminaries such as Warren Buffett and Peter Lynch--is to invest in what they know and to avoid investments they don't understand. Yet when it comes to emerging markets, investors often know little about the companies themselves or the national and regional economies in which they operate. In a sense, these stocks represent a blind spot for many investors, yet they are too important to be dismissed outright and offer performance and portfolio diversification advantages that can't be ignored. 

Before we look at the pros and cons of investing in emerging markets, we better clarify what we mean by the term. In general, emerging markets are still developing--that is, they have more room to grow than more developed markets such as the U.S., Western Europe, and Japan. Emerging markets include large countries such as China, India, and Brazil as well as smaller ones such as Poland, Chile, and the Philippines. Below is a look at what investors can expect from their emerging-markets holdings in terms of risk/reward and diversification potential.

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Adam Zoll  Adam Zoll is an assistant site editor with Morningstar.com

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