During the past three years,
emerging markets have returned more than 30 percent annually. In May, emerging
markets lost over 10 percent. While this is not comforting, it is their nature.
On a long-term basis, emerging-market equities should generate among the highest
returns with the most volatility.
Many successful investors establish a long-term asset
allocation policy and adhere to it. If the value of an asset class exceeds its
target allocation by 20 percent (target is 10 percent and actual allocation is
13 percent), the portfolio is rebalanced to its target. Conversely, if the value
drops more than 20 percent, the portfolio is rebalanced to its target.
While market timing may be possible, it is unlikely that one
can consistently forecast market turns. However, on occasion, an asset class’
valuation may exceed its historic valuation by more than two standard
deviations. If this happens, it may be prudent to overweight or underweight the
asset class until its valuation reverts to historic levels. I do not believe
emerging markets are extremely overvalued or undervalued and do not recommend a
short-term tactical change.
David H. Bugen, RegentAtlantic Capital, Chatham,
N.J.
Emerging markets were likely the
best performer in your portfolio, but returns headed south recently. Such
extreme volatility is not unusual: During the 1998 Asian crisis,
emerging-markets stocks dropped a heart-stopping 35 percent in only seven
months.
Emotions during extreme swings could lead you to buy high and
sell low. This may be why your advisor urges you to get out.
Yet there are good reasons for long-term confidence.
Emerging-markets companies will remain highly competitive for years, and their
domestic markets will grow much faster than our own. Capping exposure at 5 to 10
percent of your portfolio and considering emerging-markets hedge funds may be
the best option to balance concern about risk with the potential for high
returns.
Milton Stern, Bridgewater Advisors, New York
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