Investing in Emerging Markets
Thursday, June 29th, 2006
By George Leong, B.Comm. for Profit Confidential
In past commentaries, I have written about the need to diversify outside of North American markets. Gains in stock markets in Japan, India, South Korea, and Latin America have been outstanding. Yet while there is a need to invest some of your capital in foreign markets, you must also be aware of the added risk of investing in markets that have shown superior growth.
Recently, stock markets around the world sold off after comments from Federal Reserve chief Ben Bernanke regarding the need to curb inflation, fueling speculation of more interest rate increases than expected. Higher U.S. interest rates increase the attractiveness of U.S. investable assets. The interest rate differential between U.S. interest bearing instruments and foreign interest bearing instruments rise in favor of U.S. instruments.
What happens, given everything else is equal, is the risk associated with investing in markets in emerging areas such as Latin America and Asia is much higher than investing in U.S. or Canadian markets. As a result, capital flows out of higher risk assets and into safer haven regions.
If you are invested in some of the emerging markets such as Argentina, Brazil or even Mexico, you need to be extra cautious about your investments. Once global fears increase, stocks in emerging markets can accelerate their losses. If you are up on these stocks, you may want to set a price point to exit in order to prevent major losses if the tide turns lower.
But, exit strategies should also include your core domestic holdings. Just take a look at what is happening to the blue chip DOW, NASDAQ and other U.S. indexes. Some ‘buy and hold’ strategists would tell you that investing is a long-term process and that you should not run for the exits. In my view, this opinion is passé. Taking profits and having a well-defined exit strategy is important to the overall health of your portfolio.
Next Post: Technology Sector in Turmoil
Previous Post: Understanding How the Game is Played
Tags: dow jones, federal reserve, interest rates
Tweet
Sign Up for PROFIT CONFIDENTIAL and
receive a FREE copy of our exclusive report:
"A GOLDEN OPPORTUNITY FOR STOCK MARKET INVESTORS"
We respect your privacy and
will never share your e-mail address.
George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.
