Investing in Emerging Markets

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.

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 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.