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Saturday, April 20, 2013

Should you invest in emerging market stocks?

Investing in emerging market stocks is considered risky
Emerging market economies are affected by developed nations monetary policy

Wouldn't you love to invest in Google or Microsoft? Who wouldn't? After all, when these stocks first came out they kept on going up in value. Microsoft kept splitting like a bunny and made millionaires of thousands of people all over the world. Google did the same. In fact, many early employees retired once Google hit the $600 per share mark. Wouldn't it be nice to find similar opportunities in the market now?

While there are still some deals that are sleepers in the US market, they are very few and far between. When words goes out about their value, they quickly explode in price to match their value. As a result, smaller investors such as yourself are feeling left out in the cold.

Well, the truth is that there is one place you can invest your money where the valuation train hasn't left the station. There is a place in the world where you can place your bets on local blue chips and not have to settle for the scraps of highly risky companies. Where is this magical investment place? Emerging markets, of course.

Explosive growth

If you were to lay out the Dow Jones industrial Average (and any other developed market's index) next to the index performance of the Thai or Philippine stock markets, you will quickly see how awesome emerging markets are. Returns of 15 to 30 percent annually are not unheard of. Stocks in these places move. And they move quickly.

Why the explosive growth? Many markets haven't gotten much love from global investors and, thanks to local governance changes, they are just recently getting the attention they deserve. People see that their stocks are undervalued and buy in accordingly. It is like finding a diamond in a heap of coal. As you can probably understand, global investment money is looking for returns.

Returns in developed markets are trending down since everyone and their dog is invested there. The adventurous hedge funds and mutual funds are turning to emerging markets to achieve the returns their investors demand.

Risks abound

Of course, the more reward there is, the more risks come with it. This is Investing 101 stuff. And that is precisely the case with emerging markets. Emerging market stocks are traded in some very opaque markets where regulations against stock manipulation, fake reports, and other common evils that were dealt with by developed markets decades ago are just making their way to emerging markets.

Moreover, there might be local political shocks that might make these emerging markets fade. The solution to all this, of course, is to invest only money you are not afraid to lose in emerging funds. Invest the bulk of your funds in established markets.

About the author: Edwin is behind Daily Finance Options, a blog designed to assist you in effectively cutting down your monthly expenses to help you get out of debt.

Image credit: Claudia Messe; PD