If there’s one truism I’ve found during my years in the investing field – which date back to the 1980s – it’s the fact that everything is cyclical.
What runs hot will inevitably turn cold in a few years, and vice versa.
This reality is beautifully illustrated in this following periodic table of asset class returns. The table appeared in The Wall Street Journal courtesy of Budros, Ruhlin & Roe in Columbus, Ohio.
The firm’s advisors use it to explain to clients why diversification is necessary. It also reinforces my contrarian bent. For instance, I’m not at all interested in the red-hot biotech and tech industries right now.
Instead, I’m looking at a sector everyone is avoiding like the plague…emerging markets.
I’ve been investing in emerging markets since the 1980s. Today, I’d like to share some tips on how to pick the best emerging market funds – and, just as importantly, how to avoid the losers.
Tip #1: DON’T Use an Index Fund
Index funds seriously narrow your investing universe. That’s true here in the United States, as well, but it’s really bad in emerging markets.
Data from the Institute of International Finance brings home my point. Only about $7.5 trillion of the $24.7 trillion universe of emerging market stocks is contained in the various indices run by J.P. Morgan, MSCI, and others. The rest is simply ignored.
I don’t know about you, but I don’t want to pretend that roughly 70% of emerging market stocks don’t exist. As I’ve said before, you don’t shop in just one aisle at the grocery store. Don’t do it in the stock market, either.
Tip #2: Don’t Invest in Closet Indexers
So now we’ve eliminated index funds. Next up is looking at the top 10 positions in any fund you’re considering.
If you see the names of companies like Samsung Electronics Co. Ltd. (SSNLF), Taiwan Semiconductor Manufacturing Co. Ltd. (TSM), and China Mobile Ltd. (CHL), move on.
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