Emerging Markets Hits Continue

Sometimes one country’s stock market does better than another.

It sounds like a glaringly obvious statement, and yet the financial media is always so surprised when one country or region outperforms another.

Right now the problems and poor performance continues to mount in Asian emerging markets. Indonesia just took a big hit, China is having trouble, Indian currency just dropped, and surrounding countries are slumping.

Is it time to hit the panic button?

Remember the decade of 2000 – 2009? The major problem with that decade was that foreign markets were outperforming the US. Now the major problem seems to be that the US is outperforming foreign markets. Panic now? It seems to me like a completely normal cycle. What were you expecting? For one of these markets to outperform the other forever?

Remember that the 2000 – 2009 saw flat returns for US stocks as measured by the S&P 500. Returns were negative when you factor in inflation. Emerging markets had huge returns, with total returns of roughly 200% for the decade, depending on your measure. At some point these markets were going to under-perform the US, although we don’t have any way of knowing exactly when that will happen.

This all points back to simple diversification. If you own all of these markets, you have a much better chance of getting good returns decade after decade. Most importantly, it greatly decreases the chances of a portfolio having a flat or negative decade. The catch is that, by definition, you have to hold all the asset classes all the time. This mean that at all points in time you will be holding on to some of the worst performing asset class (although you will also be holding onto the best). It sounds simple, but it is amazing how difficult it can be to execute on a simple portfolio like this decade after decade when emotions get in the way.