It makes a lot of sense to diversify outside of your home market. And that’s still true if your assets are heavily concentrated in the U.S...
WHAT ABOUT CHINA? Now, one obvious question that I’m guessing is at the tip of your tongue: Why are we buying a fund that explicitly excludes China? Just to be clear... I believe China is an attractive market that is worthy of some allocation in your portfolio. But I’m more focused on diversification. In broad emerging markets funds, China’s mainland and Hong Kong exchanges make up around 35% to 40% of the holdings... and that allocation could rise to nearly 50% in coming years, as the number of Chinese shares that are included by MSCI rises. That’s a heavy allocation to a single country in an index. What’s more, the Chinese economy is the world’s second-largest, after the U.S. – and the aggregate size of its stock markets are closing in those in the U.S., too. Increasingly, China’s economy and markets are rapidly shifting to look a lot more like those in the developed world – and soon it will be a stretch to refer to China as an emerging market at all. For all those reasons, I think China deserves its own separate allocation to your portfolio, as a China-focused fund or via a small collection of stocks. (My colleagues Steve Sjuggerud and Brian Tycangco have a newsletter dedicated to China and other emerging markets... click here to learn about a subscription.) But for our purposes here, I’d prefer an emerging market fund that isn’t overshadowed by China... and EMXC – whose ticker means emerging markets excluding China – fits the bill.
A LITTLE DIVERSIFICATION GOES A LONGWAY A lot of people are wary of investing in faraway markets. But you should also be more wary each time you put another dollar into the same markets that define your entire portfolio, home value, and income stream. It makes a lot of sense to diversify outside of your home market. And that’s still true if your assets are heavily concentrated in the U.S... even if you never have plans to leave the home of the stars and stripes. Mean reversion alone suggests that it’s a good idea to put some money in other markets – because U.S. shares won’t continue to hugely outperform other markets (and emerging markets in particular) forever. And finally, we can do it simply as a smart bet on a group of countries in our normal brokerage account. A small investment here can help us sleep well at night... while also setting us up for big potential gains. In addition to writing for American Consequences, Kim Iskyan also works with Dr. David “Doc” Eifrig on Retirement Millionaire , a monthly advisory in which Doc and Kim share investing recommendations and tips on how to retire wealthy. You can learn more about Retirement Millionaire here .
American Consequences
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