The stocks of companies based in emerging markets shot up in
2003 and have continued to outperform this year. From 1988
through 2003, an emerging markets index compiled by
Dimensional Fund Advisors appreciated at 17 percent per year,
compared with 12.5 percent for the Standard & Poor’s 500 Index.
However, emerging markets aren’t for timid investors. These stocks
sustained double-digit losses in 1997, 1998, and 2000. Therefore,
these stocks have provided above-average returns over the long haul
but they’ve given investors a wild ride on the way there.
Emerging markets are attractive because there’s much more growth
potential in young economies than in developed ones. The majority of
the world’s people live and work in developing nations and their
average age is lower than the populations of most developed countries.
As this younger population matures, millions of people will turn into
new investors and start thinking about retirement. That will raise
demand for stocks, which should raise stock prices.
On the downside, financial markets, accounting standards, corporate
governance, and government regulation are all relatively
underdeveloped in places like Brazil, Chile, Poland, and Russia.
Your best approach is to invest through a mutual fund that’s widely
diversified geographically. Possible choices:
Vanguard Emerging Markets Index Fund. The fund holds about 450
stocks, most of which are based in South Korea, Taiwan, South Africa,
India, and Mexico.
iShares MSCI Emerging Market Index. This exchange-traded fund
emphasizes large-cap companies.
T. Rowe Price Emerging Markets Stock Fund. This fund has a moderate
management style that avoids steep losses while supplying decent
long-term returns.
