The investment in emerging markets has always carried risk, but you risk your money any time you invest in something. Nevertheless, you never want to take more risk than necessary. You will not get paid for poorly thought out plans. You can lower the risk of expensive mistakes in the emerging market stocks when you follow the right tips. Understanding how it works also goes a long way to stop you from the dangers of putting your money in the wrong place.
What Can You Do to Make Emerging Market Stocks Profitable?
A lot of the major emerging market companies arrange bonds and stocks in the finance capitals. Normally, you want to build diversification across markets. You can diversify through either investing in a couple different regions and countries or currencies.
Look for diversification within markets. You can invest in stocks, mutual funds, bonds and cash and currency derivatives. Before you invest, also check to make sure you have not invested in a currency that will be similar when trading. This saves you a lot of heartache down the road.
Learn from big-time investors like Warren Buffett, nicknamed the Oracle of Omaha. Buffett emphasizes the importance of doing company research. You want to know the possible risks involved with a company before you get involved. Also, you want to know the potential on your return. Warren Buffett often says to invest in companies with little debt.
The reason? A company with less debt can stay afloat easier when times get hard, and every business experiences its ups and downs. Nevertheless, companies with fewer debts have an easier time navigating the turbulent waters of the dog-eat-dog business world. With the governments of some emerging markets, they need outside investors to pay the infrastructure, but a company with too much debt may not be able to pay it back.
Observe the customers and the suppliers. You will see the relationships the company has with suppliers and customers, and this lets you know if the company is legitimate. Also, the relationship between the providers and the customer is essential. A growing body of research addresses the various aspects. A company with numerous relationships with their suppliers and does lots of networking will have a clear competitive advantage.
Tips When Investing in Emerging Market Stocks
Tip #1: Monitor the News of That Sector
Whenever you invest in emerging market stocks, you should turn to the news sources of that market and the publications that look at the sector on a global level. Warren Buffett tells us most news only serves to make noise. You have a lot of financial news.
You can follow the 80-20 rule to get better information. Basically, that means 80 percent of the outcomes can be attributed to 20 percent of the causes. A lot of news exists to trigger our emotions or create “buzz,” and these are the types of news articles we want to step over.
Tip #2: Volatility Is the Nature of Emerging Market Stocks
Before you invest in emerging market stocks, you should first understand that these stocks have a volatile nature. You take on added risk with the hopes of higher returns. Nevertheless, the extra return does not correlate with the returns you might uncover in the developed markets, and you can expect more ups and downs in markets like this.
Tip #3: Adopt a Long-Term View
As the name suggests, emerging market stocks have all undergone a transformation, and the change sometimes takes a long time. You need to maintain your perspective on the growth potential over the long term with these stocks.
Look at the incredible opportunity open for growth and follow through with it. Even if a particular stock has a short-term hassle, the main thing that matters will be that the stock becomes profitable over the long term. Think with a seven to 10-year mindset.
Tip #4: The Best Moves Usually Take Time
Investing in emerging market stocks will not set you on a get-rich-quick path. Most people with this thinking end up going broke sooner or later. As Warren Buffett puts it, investing is not meant to be exciting.
In particular, when you take on a dividend growth investment, take a more conservative approach. Warren Buffett says your best bet is to invest in quality businesses with a proven track record of producing value. Over the course of several years, the value compounds, and when you do it right, you notice it in your investment portfolio.
Tip #5: Choose Active Over Index Funds
ETFs, also known as exchanged-traded funds, have a place in every investor’s portfolio, but index investments in emerging market stocks mean you will have to accept the market return during a period with heavy losses. In some cases, it makes sense to pay a higher fee for an active fund manager because they limit the capital losses.
Tip #6: Understand What You Will Receive
Sometimes investors want larger exposure to the Brazilian, Latin American and African economies, but you rarely get this through the emerging market funds. In fact, around 65 percent of the emerging markets index bases itself in South Korea, China, India, and Taiwan. Whenever you invest in emerging market stocks, it increasingly becomes more of a bet on Asia than other regions.
Tip #7: Scrutinize the Manager
Ask yourself what is the manager’s reputation and how has she performed in the past? Also, what’s her investment style and does it come with fees? A manager might have experience, but does she have the qualifications of working with emerging market stocks and the people of that region?
Emerging market stocks play an interesting role in the stock market. Those looking to make money should know these markets have a lot of potential if you know what you’re doing. If you found this article helpful, please feel free to share it with your friends and leave comments below. We’d love to hear your opinions and have an active discussion about the subject.