On this week’s episode, Josh & Austin discuss Emerging Markets! They talk about the history of the emerging markets, associated volatility, China, how to track Emerging Markets, and ETFs and mutual funds that relate to the topic. In the end, Josh puts on his CFP® hat and gives advice for anyone looking to diversify their portfolio.
Main Talking Points
[1:42] – What is an Emerging Market?
[3:07] – History of Emerging Markets & The Emerging Market Index
[14:50] – Is China Still an Emerging Market?
[18:55] – Dad Joke of the Week!
[19:36] – What’s the Risk in Emerging Markets?
[23:00] – Investing in Emerging Markets
[27:54] – What Role Can Emerging Markets Play in a Well Balanced Portfolio?
[31:42] – We Are Here to Help!
Links & Resources
Business Insider: History of Emerging Markets
Don’t Fall For It: A Short History of Financial Scams
Forbes: China Thinks it’s an Emerging Market
Free Guide: 8 Timeless Principles of Investing
Social Media
Full Transcript
Intro:
Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments. Here are your hosts, Josh Robb, and Austin Wilson.
Austin Wilson:
All right. Hey. Hey. Hey, welcome back to The Invested Dads Podcast, a podcast where we take you on a journey to better your financial future. Today, that specific journey, that financial journey, is going to take you all around the world because we are going to be talking about emerging markets.
Josh Robb:
All right. So we’re talking about when a country is trying to get on the highway from the on ramp?
Austin Wilson:
Not exactly that’s merging.
Josh Robb:
That’s merging. Oh I’m sorry. So these are new countries, emerging, coming out. So like Wakanda, right?
Austin Wilson:
Okay. So speaking of Wakanda, I have yet to see Black Panther.
Josh Robb:
It’s a great movie.
Austin Wilson:
It’s on Disney plus, it’s on the list. My brother-in-law is a big Marvel fan. So he and my sister and my wife and I are slowly working our way chronologically through the Marvel universe, and we’re through the ’90s. So we got Captain in Marvel. We’ve watched two.
Josh Robb:
Okay. That’s good.
Austin Wilson:
We have a little ways to go, but we’ll get to Black Panther eventually. But first of all, in case you didn’t know, Wakanda does not really exist.
Josh Robb:
What?
[1:42] – What is an Emerging Market?
Austin Wilson:
So, mind blown there. But that is a topic for another day. So don’t be buying like bonds from Wakanda, someone would sure be ripping you off. But what we’re talking about is the actual existing economies that are emerging in terms of their economic leadership in the global economy, and specifically, investment into their economies and whether that be through debt or equity vehicles. So investing into the economies of markets that are not quite developed, as in terms of mature economies.
Josh Robb:
Okay. So emerging mean they’re coming on to more of the developed stage, not that they’re not that they’re a newly established country that just showed up on the map. It’s a country that’s been impoverished, or third world, but is making technological advancements in infrastructure to move towards a more developed system so that they can compete in trade with other countries.
Austin Wilson:
Or even, like it’s a funny thing. So when you think of emerging markets, Greece is technically an emerging market, but they have one of the oldest economies on the planet. So you don’t necessarily have to have limited economic history. I think it’s really about growth and about coming to development to catch up to the major Western Europe, or United States, level of technology and infrastructure, like you said.
Josh Robb:
Because like Brazil fits in there as well, and they hosted the Olympics. So they obviously had the infrastructure there to host the Olympics, but they’re still considered emerging.
Austin Wilson:
Exactly.
[3:07] – History of Emerging Markets & The Emerging Market Index
Josh Robb:
Good deal. So is this new? Emerging markets? Obviously we just talked about some countries that have been around for a long time that are classified in here, but investing in emerging markets, is this something new or has this been around?
Austin Wilson:
Well, that’s a tricky question. So first of all, way back in the ’80s, so like when you were born-
Josh Robb:
Yes.
Austin Wilson:
Specifically in ’86 to ’87, that timeframe, a little bit more than 30 years ago, MSCI Global is a global leader in indexing and data and benchmarking, they founded the emerging market index. So about 30 years ago. So we can trace back the way we think about and talk about emerging markets about 30 years, as far as like a grouping, like an index or a benchmark. But exactly what even defines an emerging market, that’s even debated today. But think of it this way, it’s a way of looking at a group of global economies that are in a higher growth phase in their life than that of more developed established economies like the US or Western Europe.
Josh Robb:
Okay. So I am older than this index? That’s pretty cool. So before this, before I was born, were there any ways that somebody that wanted to invest in that could do that? Before this index was created?
Austin Wilson:
You ready to buckle up and get a little nerdy?
Josh Robb:
Let’s do this.
Austin Wilson:
Because there was a great article that I read and we’ll link it in the show notes from Business Insider. So they put together the article, which was done based on the research from a company called Renaissance Capital and Renaissance Capital like dug into the weeds of investing in emerging markets. So let’s go, we’re going to take a step way back. We’re going to start back in the fourth century BC, and this was actually in Greece. So the fourth century BC in Greece, 10 Greek municipalities, belonging to the Attic Maritime Association defaulted on their loans from the Delos Temple. So this kind of reminds me of the Greek debt crisis. The banking crisis-
Josh Robb:
They went through this a couple years ago.
Austin Wilson:
It’s like all over the place-
Josh Robb:
They never learn their lesson.
Austin Wilson:
But Greece. Yeah, like I said earlier, they would be considered an emerging market today. But back when this occurred, they were like the philosophical, technological, intellectual capital of the world. So it’s kind of come full circle. So that’s fourth century BC. So flash forward about a thousand years … 2000 years, about 2000 years, to 1602. 1602, the Dutch East India Company is founded. That was the first joint stock company to have freely tradable shares. Based on the fact that my wife and I had been watching a lot of Pirates of the Caribbean lately, Disney plus, they talk about the East India trading company in, at least the one, a lot. So, and the second one, I think too. So Dutch East India Company trading, talking about trading. It’s interesting that that’s it goes back that far.
So flash forward, another 120 years, 1720. The South Sea bubble. That was a key point for emerging market investing. Even Isaac Newton fell for this one. He was one of the smartest people who ever lived. We did an episode where we talk with Ben Carlson about his book, Don’t Fall For It: A Brief History of Financial Scams. Also, through that in the show notes, where we discuss this very bubble. But that was a very interesting situation.
Josh Robb:
That’s a great book to read because it takes some of those, and again, you don’t have to love finance to really find that book intriguing because it talks about really the ways that people get tricked into this hole, or get caught up in the hype of these type of bubbles, and bought into it, this being one of them. That was good.
Austin Wilson:
So another 40 years later, in 1763, Baring Brothers opens the firm finance the Louisiana purchase in 1803. So we know the Louisiana purchase here in the United States, specifically, was a big deal for that part of the country. So flash forward, another 40 years and NM Rothschild & Sons opens its London office. The Rothschilds organized the financing for the first attempt at an underground channel between France and Britain. Think about that. 1804, they’re already talking about a channel between France and Britain under the ground, that, I don’t know how and using 1800 technology that would have happened.
Josh Robb:
It’s digging with a spoon. Like, “We’ll get there.”
Austin Wilson:
“We’ll get there by about 1940.” So anyway, that was 1804. They also finance projects for Britain’s purchase of Egypt’s share of the Suez Canal in 1875. So lots going on there. Lots going on in the early 1800s, in general. Between 1822 and 1824, oh boy.
Josh Robb:
I want to pause real quick. So it took me a while to catch onto this, but the one in 1763, the Baring Brothers opened the firm where they finance the Louisiana purchase.
Austin Wilson:
Yes.
Josh Robb:
I’m thinking, what does that have to do with emerging markets? That’s the United States, a developed country.
Austin Wilson:
Exactly, think about it.
Josh Robb:
Then I realized, we were the emerging market-
Austin Wilson:
We were THE emerging market of the world.
Josh Robb:
Yeah, Just colonies hanging out, doing their thing, and becoming independent. Wow. So that was us.
Austin Wilson:
So yeah. Think about that. Someone had a way to invest in the United States before it was the United States. They probably made a pretty penny, over time, compounded. Time is the key there. So between 1822 and 1824, bonds were floated in London by Colombia, Chile, Peru, the province of Buenos Aires, which is actually in Brazil. Also Brazil itself was separate from that, at that point. Mexico, Guatemala, Greece, and there was even an imaginary bond floated from Poace.
Josh Robb:
What was that like?
Austin Wilson:
It’s kind of like Wakanda. But yeah, I think it was a scam that went on back then. So this is kind of the early periods of investing in emerging market debt. London was obviously the biggest stock exchange in the world at that point in time. But typically, you think of emerging markets as … At least, I typically think of emerging market, as buying equities, stocks, from emerging market countries, but emerging market debt is just as big as emerging market equity. So that’s 1824, then the next year, in 1825, the London Panic of 1825 triggered a bunch of sovereign defaults. First Peru defaulted, and many others followed after that. All Latin American issuers except Brazil were in default by the end of the decade. So lots of volatility and choppiness already, we’re seeing an emerging market investing, emerging market default, and debt markets, they were and have been kind of all over the place.
So in the mid 1800s through to the early 1900s, what we would consider modern emerging markets kind of begin to emerge. So Russia was the first to see trading of shares in about 1830, at the St. Petersburg stock exchange there. But it ceased to be a market economy in 1917 after the revolution, same thing kind of happened in China in 1949. So again, you’re picking up on the theme of volatility, there is a lot of issues of things look good, things sound good, things are going well, things fall apart. That is a very common theme with the emerging markets investing.
In the 1930s, over 40% of countries that this company Renaissance Capital could find data for, they were in default by 1936. 40% of those countries, that is a ton. Then The Great Depression fueled a collapse in global trade, which triggered even more sovereign debt defaults. So then we get into World War II, which was obviously tough, and after World War II, emerging markets tended to borrow only from banks and multinational organizations in dollars, or other hard currencies. So they were taking some of the currency fluctuations from their economies out of the situation-
Josh Robb:
Yeah because you may have … Yeah, an emerging market that has their own currency-
Austin Wilson:
If their currency’s going wonky-
Josh Robb:
And the government says, “Hey, you know what, let’s just start printing a bunch.” Then you got people with wheel barrels of money moving around. Then if I’m an investor overseas, all of a sudden, if I’m owning it in local currency, I’m in big trouble because they just devalued it like crazy to help boost their … The government helped to boost their position and I just got hurt. So yeah, that makes sense why they’d move that way.
Austin Wilson:
So then in 1971, so the Bretton Woods Agreement collapsed, and we talked about that in a different episode as well. We’re going to plug that one too, put that in the show notes, that was that busload about the gold standard, our silver episode.
Josh Robb:
That’s right.
Austin Wilson:
So we’ll link that in the show notes as well. But US banks continued to lend to emerging markets during this time, even though there was an oil crisis going on, there was inflation shock, and recession, and not only in the US but around the world. So check that episode out, but we did go into a little bit more depth on the Bretton Woods Agreement there. So between 1979 and 1980, the US Federal Reserve hiked interest rates to 20%. So, wow. That’s a lot of … If you think of we’re in this world of pretty much no interest rates.
Josh Robb:
Yeah. 0.25.
Austin Wilson:
So 20% was a lot. Now, quote, this is the quote from the company who did the research for this, “The associated dollar spike and increase in interest costs combined with the world economy entering recession in 1981, saw Mexico is the first to announce that it would no longer be able to service its debt in August, 1982.” So not a good time for Mexico, which even today would be considered an emerging market, but back then was also considered an emerging market.
Josh Robb:
So the US debt, being a developed country with arguably one of the most stable economies in the world is having 20% interest rates, then if I’m going to be enticed to go elsewhere, what is the emerging market offering? I mean, it’s just ridiculous. Yeah.
Austin Wilson:
For the risk.
Josh Robb:
Yeah. That’s why they couldn’t afford it. I mean, 40% interest rate or something, who knows what it was. That’s crazy.
Austin Wilson:
So this caused, throughout the ’80s, US banks, which were already a little overexposed to emerging markets to pull back on their lending, which led to further defaults by these because they couldn’t get the loans, they couldn’t get the underwriting for their debt. It was just … It was a situation. So this crisis really hit Latin America pretty broadly, but Eastern Europe and Africa also had a lot of impact from that. The ’80s were rough for emerging markets.
So in 1989, the Brady Plan was formed. That was named after then US Treasury Secretary, Nicholas Brady. So that happened. Then there was a drop in global interest rates, which eventually helped end the crisis. So things got really, really choppy in the ’80s and they did settle down towards the end of the decade. So in 1998, and I quote again from the Ren Cap team here who put together a great research piece, after a decade of defaults, all major Brady restructuring were completed and had resulted in a liquid, easily tradable market of hundreds of billions of dollars of standardized dollar bonds, issued by emerging markets.
Over time, more traditional hard currency bonds started to be issued and Brady Bonds retired. So this was a time of stabilization that really started … The ’80s were pretty rough, the ’90s got more stable, and they had a lot of backing and help from the US in pulling together their debt markets. Yeah, so the ’90s were better.
Josh Robb:
So we saw more stability, but still had volatility. There was still volatility, but they just, we weren’t seeing the default of a whole country like you had in the past.
Austin Wilson:
Correct.
Josh Robb:
Okay.
[14:50] – Is China Still an Emerging Market?
Austin Wilson:
So then in 2001, the company Goldman Sachs, their own Jim O’Neill coined the term brick, BRIC, which stood for Brazil, Russia, India, and China. Then also added South Africa in 2010 making the term BRICS. That’s kind of something that some people think about when they think about emerging markets, as those are like the leader, the big emerging markets, that people can invest in and really have a lot of infrastructure and a lot of financial security behind them compared to some other smaller economies.
Josh Robb:
So since we were talking about fake economies added into this, if you had the Lord of the Rings added into this, would that be BRICKS and Mordor? I’ve just about made him spit out his-
Austin Wilson:
I just took a sip of tea. BRICKS and Mordor.
Josh Robb:
Yes. I’m sorry. I had that wrong.
Austin Wilson:
BRICKS and Mordor. So yeah, BRIC.
Josh Robb:
Yeah, B-R-I-C. But that’s a good way to remembering. When you’re thinking emerging markets, Brazil, Russia, India, and China are the big countries that make up a lot of that index. If you look at that standpoint, especially China. I mean, it’s huge.
Austin Wilson:
I mean, it’s the second biggest in the world, in terms of … at least equity markets.
Josh Robb:
Yep. Well, speaking of China. I mean, if you look at China, should that even be an emerging market anymore? That’s the big question. A lot of people ask that. So looking through, Forbes had an article, it was actually a couple of years ago, they published this, so we’ll have it in the show notes. But in it, they were kind of highlighting that, and this is still true today if you look at the index, and the ETFs that track the index, China makes up one third of the total index. So when you buy into an emerging market index, you are buying, one third of that whole thing is just in China, and China companies within the country.
It’s three times the size of the next largest country, which is South Korea, which arguably is probably more developed, or more on the line of being developed in China, as an overall economy. They’re three times the size of that, and of the top 10 holdings, if you look at kind of the larger traded ETFs, six of those companies are from China and no other country has more than one in the top 10. So it makes a big piece. What happens to China really moves the needle on emerging markets.
But if you look at the progress they’ve made, are they still emerging market? I mean, look at some of their cities are very developed. I mean, they rival any other city across the world in technology and comforts that are offered.
Austin Wilson:
They also have a lot of wealth that’s been gendered.
Josh Robb:
There’s a lot of wealth in there. Yes. And If you look at the … Speaking of wealth, no other country outside the US, has more billionaires than China.
Austin Wilson:
Wow. I’m sure that that was not the case 40 years ago.
Josh Robb:
No, no this is recent development.
Austin Wilson:
This is all new. This is new money.
Josh Robb:
It’s just worth thinking, now again, if someone decided, “Hey, you know what, China’s not an emerging market anymore,” think of the chaos that would ensue for this whole investing complex of ETFs, everything that tracks this index of what is and what isn’t an emerging market. So it’s kind of, once you’re in that category, if you’re big, you’re probably going to stay there for a while, or at least find some way to transition out of there without causing that disruption.
Austin Wilson:
I think that I’ve seen some ETFs and maybe some funds, or some indexes, that are now starting to exclude China because of their like … Yeah. Are they really an emerging market in terms of size? Arguably not anymore. So if you’re really looking at that emerging side of things and the things like, yes, China is obviously still growing very quickly, but in terms of size, they’re the second largest economy in the world, there’s not a lot of up to go.
Josh Robb:
Yeah. But, China’s a huge place. If you leave those cities, you do see the develop part of that still needs to happen. I mean, there’s a lot of places in China that-
Austin Wilson:
Yeah rural China is very rural China.
Josh Robb:
Yep. So you can make an argument both ways. Just because they have some large cities and a lot of the wealth is concentrated in one spot, does that make the whole country no longer emerging or do they still need to expand that way and get more and more developed?
Austin Wilson:
Exactly.
[18:55] – Dad Joke of the Week!
Josh Robb:
All right. Let’s take a break real quick. Dad joke of the week. All right. So here we go. Just a question for you, Austin. Do you know when a normal joke becomes a dad joke?
Austin Wilson:
I usually refer to that as the point when people stop laughing.
Josh Robb:
It’s usually when people roll their eyes, but here’s the actual answer. A dad joke happens when a regular joke becomes apparent.
Austin Wilson:
Hahaha.
Josh Robb:
So when it’s a-parent.
Austin Wilson:
That’s a good one. That’s a good one.
Josh Robb:
That’s what I have for today.
Austin Wilson:
Yeah, that’s good.
Josh Robb:
Then, quick followup. I wouldn’t buy anything with velcro, it’s a total rip off. Just keep that in mind when you’re going shopping.
[19:36] – What’s the Risk in Emerging Markets?
Josh Robb:
All right. So back to where we’re at, from all this history that we just talked about, you’re walking through from all the way back in fourth century BC, all the way up through the early ’90s, and into the 2000s where we’ve seen more of a streamlining and more of a classification and kind of boxing in what an actual emerging market is, where do we go from here? I mean, there seems to be a lot of risk in this. There’s obviously defaults. We talked about that. Countries defaulting, not just … When we talk investing with companies, sometimes, “Oh, they may default, go into bankruptcy,” but we’re talking countries defaulting on their loans, okay. So I assuming it’s volatile, that’s what we see. Talk a little bit about what we’ve seen on that track record.
Austin Wilson:
Well, so if we go back to where MSCI started tracking emerging markets, kind of the way we think of them today. So that was back till 1986 or ’87. So around that time … Since then, the MSCI Emerging Market Index has returned a total of 825%. So that’s a little bit-
Josh Robb:
That’s big. That’s a lot of numbers.
Austin Wilson:
That’s a lot of percent, that’s a little bit more than 7% annualized since the beginning of 1980, excluding dividends. So take dividends out of the situation. By contrast, the S&P 500, which is kind of the easiest benchmark to think of for United States equities has returned a total of 1144%.
Josh Robb:
That’s more percentage.
Austin Wilson:
That’s more percentages. So that’s almost 8% annualized over that same period, again, excluding dividends. So not a huge … I mean, on a one year, so an annualized percentage, not a huge percent difference … not even 1% in terms of annualized percentages. And I would say they’re probably even a little closer because when you stray outside the US you typically get a higher dividend yield. In a lot of developed markets, yes, I think of Europe for one, but emerging markets as well, dividends are a way that … You can get a better yield, oftentimes, outside the US. So that may even, total return, be a little bit narrower than that.
Where things are different is how these returns are generated. So US stocks have for sure had their fair share of bear markets during this time. We’re on our way onto one right now, as we’re recording this. But the volatility that you have to withstand with the emerging markets is significantly more even yet. So one year, they are going to rip the face off the S&P 500 and double it in terms of stock market performance. But the next year it’s going to be down 20%, while the S&P is up two, or something like, the swings are very, very, very, all over the place.
And recoveries are often less stable or less predictable and more choppy as well. That’s something that is at least worth considering with where we are at in this global COVID-19 recession, that’s happening, it’s going to take some time to come out of it. I think the US has, at least an understanding, of what it’s going to take to come out of it. But there’s going to be maybe a little bit more bump in the road for some of those emerging markets.
[23:00] – Investing in Emerging Markets
Josh Robb:
Because they almost have to wait for us to come out before they follow suit because if they’re relying on us for infrastructure, those types of things, or just the appetite to buy the higher yield of the debt that they’re offering, or the stocks. Yeah, you’re right. It could be very choppy. But, you can invest in it. So tell us what were some of the ways you can invest in this trend?
Austin Wilson:
Well, I want to say, as usual, that I am not advising anyone to go out and buy anything I’m talking about here, especially when it relates to emerging markets. They have even more risk than United States equities or whatever. They’re a lot more volatile, but there’s definitely ways to gain exposure to this theme, to this trend, and to this big part of our global economy that is growing. But always talk to your financial advisor, see if it’s something that fits your risk tolerance and your overall financial plan. But anyway, some ideas, think about individual stocks, companies that you know, or have heard of that are based out of the United States.
So companies like Alibaba or Tencent out of China, companies in Russia, Brazil, Eastern Europe, Africa, individual companies you can invest in that are based outside the United States. So yeah, a lot of times in the United States, you can get what’s called an ADR or an American Depository Receipt. That is where you can invest in foreign shares of a foreign company in US dollars that are held and registered here, it’s safe-
Josh Robb:
And you get a receipt. So you know you purchased it.
Austin Wilson:
You can hold onto it in your pocket.
Josh Robb:
So another, like South Korea, obviously we mentioned is one of the emerging markets. Samsung, I think, is there-
Austin Wilson:
Samsung is there.
Josh Robb:
So a company you’re familiar with, you look at, like that’s what my phone is. Or you see the TVs and all the cool stuff, but like, you could see a company and say, “Okay, there’s one that, if I do my research and I like where it’s at, at least I know what it is and what it does.” You don’t have to go buy something you’ve never heard of. There’s countries that have companies within them that are globally-
Austin Wilson:
Think of things like Hyundai. Those are things. So a funny story, I make fun of you frequently for your Samsung phone.
Josh Robb:
My great phone. Yes.
Austin Wilson:
So I have an iPhone and I’m an Apple guy, I love my Apple products. So I have an iPhone SE, which is the last small iPhone you could buy.
Josh Robb:
It was created in ’97?
Austin Wilson:
When I was six. So I hate on your phone all the time, but I bet your phone’s never done this. Today, my phone all of a sudden started vibrating, like a notification, but constantly for at least five or ten minutes and I restarted it like three or four times.
Josh Robb:
It just was going?
Austin Wilson:
And then it stopped and it’s been fine ever since. So speaking of Samsung.
Josh Robb:
Maybe that was the time to upgrade your phone alert.
Austin Wilson:
So I told our colleague Adam about that, and he said, “Yeah, I think that’s the Tim Cook alert on, ‘It’s time to go buy a new iPhone.’” So anyway, back to emerging markets, iPhones are made in China. That’s an emerging market. There you go. You can also gain exposure, and this is one of the ways that I would say is probably much easier to understand, is through ETFs, or exchange traded funds, which often mirror indexes or whatever. There’s a couple where like, iShares, emerging markets ETF, ticker EEM. That is, literally, it’s meant to mirror the index. They’re very affordable ways to gain emerging market exposure.
WisdomTree Emerging Market, corporate bond ETF, EMCB, VanEck Vectors Emerging Markets Aggregate Bond, EMAG. You can also go the other way of anti-China or you can go full China. You can say, “Kraneshares MSCI All China Index,” KLL. So those are some ETFs to do that. Also, mutual funds are a good way to get exposure through this. This is a great thing where I think, especially with the emerging markets, if you just buy the index, or you buy a passive vehicle, you’re going to get a very cheap cost for that, you’re going to pay low fees, low management fees for that.
But I think some active management, when it comes to emerging markets could be very, very valuable to kind of weed out the things that you for sure don’t want to be invested in, where the passive things are just going to be in there like the index would be. So I think some things like Oppenheimer Developing Markets is a fund that’s very well run, very good active management. Most large fund managers should have an actively managed, or probably do have an actively managed emerging market fund. It’s going to be a little bit more expensive than something passive, like an ETF.
Josh Robb:
Also, developing market, emerging market, there’s terms that are kind of interchangeable here, like new world. The idea that there’s … You may not see emerging market necessarily the title, but something indicating that it’s not the more developed worlds, but developing, or are new, or emerging, those types of things is what you’re looking for if you’re trying to invest in this.
Austin Wilson:
Yeah, and your financial advisor would know if you mentioned emerging markets or any of those terminology, they should know, and be able to point you in the direction of what they would recommend for your situation. So Josh, it’s time to put on your CFP hat. You’re a CFP Certified Financial Planner, put on your CFP hat-
[27:54] – What Role Can Emerging Markets Play in a Well Balanced Portfolio?
Josh Robb:
They used to sell hats with that logo on it.
Austin Wilson:
I know. Jess has one.
Josh Robb:
I don’t have one though.
Austin Wilson:
So what role can emerging markets play in a well balanced portfolio?
Josh Robb:
All right, so first and foremost, one of the biggest roles that plays is in the diversifying of your portfolio. So we always talk about this, “Well, you need to be diversified,” because if you own only one individual thing or one individual sector, even if you go all the way down to one company, you’re going to follow whatever they’re doing up and down. So diversifying, spreading out, helps smooth out those ups and downs. So another way to diversify is to leave the developed world and end up in the emerging market world. So that, just like you mentioned, they don’t always follow suit with what’s going on here in the US or in Europe or wherever else. So that helps diversify. So that’s the big thing.
Like you mentioned those ETFs or mutual funds, they also then further diversify. If you’re not buying individual companies, the ETF or mutual fund will hold a basket of goods. So you’re again, spreading it out. So if I want 10% emerging markets, I’m not buying one emerging market company and saying, “Look, I got 10% emerging markets.” So you got 10% of one company, you’re not diversified. So you buy an ETF or something like that, you’re spread out. So that’s, again, the diversifying thing.
Emerging markets tend to react differently. So again, you’re spreading out your volatility in that they may not always respond to the same thing. Emerging market debt responds differently than emergent market stock. Same thing as emerging market debt responds differently than developed world debt, like US treasuries. They don’t move the same direction. So, again, you’re just spreading out what you’re investing in, and we always say, a good diversified portfolio should never have all your investments doing the exact same thing at the exact same time. If they’re all going up, then you’re not really diversified as much as you probably think.
Austin Wilson:
And you may be happy while it’s all going up-
Josh Robb:
But when it all goes down, you’re going to say, “I thought I was diversified.” So there’s always something in your portfolio you should not be happy with, that means you’re diversified pretty good. Which sounds weird to say, but it’s there for a different reasons. If your US stocks are going up and for just a simple example, your US bonds are not, it’s not because there’s something wrong. It’s because they’re not designed to be up in those strong stock markets, they’re designed to protect in the down stock markets. So again, diversification is huge. That’s where you can get different types of returns from different types of volatility.
Austin Wilson:
Yeah. So I’m going to put you on the spot.
Josh Robb:
Yes.
Austin Wilson:
Should you invest in emerging markets right now?
Josh Robb:
Well, that’s a great question. It really comes back to what you said, is working with financial advisor, because the answer to that question is, I don’t know based on whatever your situation is. If you’re trying to build a diversified portfolio, then the answer is probably yes, you should have something in emerging markets because again, a good diversified portfolio will have a lot of different pieces. So should you be investing now? Now versus another time? I mean, it’s down as well, we’re kind of a recovery phase after we went through a COVID-19 and we saw a lot of markets drop, that they’re down in price than they were at the beginning of this year.
So from a timing standpoint, yeah. I mean, everything’s down. So investing is kind of a good spot right now, but we don’t know what’s going to go on for the future. They’re reacting and they’re getting impacted differently from COVID-19 than we are. They don’t have the infrastructure in the hospitals that we do here in the US to handle a large caseload. So again, should you invest, that’s a good conversation with your advisor to say, “Can I stomach the volatility that may happen from owning this type of investment?” And so that’s really the end response.
[31:42] – We Are Here to Help!
Austin Wilson:
So I guess to sum that up, where and how you invest your hard earned dollars, whether that be domestic, developed, international, emerging markets, equity, fixed income, mutual funds, stocks, bonds, whatever that might be, it is a serious topic, and it deserves the very best financial planning and advice possible. Josh and I want to let you know that we’re here to help. If you don’t have a financial advisor, or if you simply just want to hear more about what we do, and we work at Hixon Zuercher Capital Management. If you want to know what we do here, please check out the invest with us tab on our website. We’ll link that below in the show notes. We work with a team of credentialed, experienced colleagues that have worked alongside our clients for nearly two decades to help them achieve their financial goals. We can help you too.
Josh Robb:
Yep. As always, on that website, check it out. We got a free gift for you. It’s eight principles of timeless investing. It’s free. Just eight overarching themes to help keep you on track. What else can they do to help us out for this podcast?
Austin Wilson:
Yeah, we would just love it if you’d subscribe, if you’re not subscribed already, leave us a review on Apple podcasts and email us any ideas or any questions@helloattheinvesteddads.com. We will get back to you. We definitely check that all the time. Please share this episode if you enjoyed it with friends and family. We’d really appreciate that.
Josh Robb:
Yeah. Like we said the hello@theinvesteddads, that email is for questions that you have as well as topics, because we want you to enjoy listening to this. We want to talk about the things you want to hear about. So if you have an idea, whatever it is, shoot us an email. We’d love to hear it. Thanks for listening, and I hope you learn something new about emerging markets. It is not what I thought it was at the beginning, and so I’m glad I learned what it was supposed to be. We look forward to talk to you next week.
Austin Wilson:
Yep. Talk to you next week. Bye.
Outro:
Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode, and we had a positive impact on your life, leave us a review, click subscribe, and don’t miss the next episode.
Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin, or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only, and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast.
There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.
