Why Emerging Market Allocations Matter to Long Term Investors
Whenever there are periods of uncertainty, it is not uncommon for marketing departments at financial institutions to try and synthetically create demand by trumpeting new products or strategies. These folks are very clever because they play on short-term fears, but they always pitch the same message: the world has changed irrevocably and you need to throw your current strategy out the window and replace it with our latest and greatest strategy.
One of the asset classes that has been the victim of a lot of bad press lately is emerging markets. Over the previous decade (2010-2019), here is how emerging markets have performed compared to the S&P 500 and international developed markets:
Annualized Returns (2010-2019)
- Emerging Markets: 3.70%
- S&P 500: 13.60%
- International Developed Markets: 5.30%
What the marketing departments are hoping that investors don't realize is that the reason we hold different asset classes is not because they always perform well but because they provide diversification of risk, which, in our opinion, is the key to long-term wealth creation. To illustrate our point, please take a look at a comparison of returns over the following two time periods:
Annualized Returns (2000-2009)
- Emerging Markets: 9.80%
- S&P 500: -0.95%
- International Developed Markets: 1.60%
Annualized Returns (1988-2019)
- Emerging Markets: 10.70%
- S&P 500: 10.80%
- International Developed Markets: 5.90%
As long-term investors, our goal is to build a portfolio based on our risk tolerance and then let capital markets work in our favor to grow our wealth. At Stratus, we believe a consistent, risk-based asset allocation allows you the best opportunity to reap the rewards of the risk-return trade-off inherent in capital markets.
If you have any questions or would like to discuss your asset allocation in more detail please do not hesitate to contact us. For additional information on the importance of investing in emerging markets, please see the attached report from Dimensional Fund Advisors.