I am a man in his early 50s with a total portfolio of about
$100 million. Some 20 percent of that is invested in emerging markets, which
have performed amazingly well for me over the past few years. Since the meltdown
this past May and June, my lead financial advisor has been urging me to get out
of the field. But I’ve never been afraid of a little volatility. Do you agree
with my advisor? Emerging markets have had an
exhilarating rise, with a typical basket of stocks tripling in value from the
lows in 2002 to the peak in early May 2006. The asset group has the expectation
of high returns and high volatility. The 15 to 20 percent loss experienced in
the last three weeks of May highlights the dangers.
Emerging-market investments probably have a place in your
portfolio. While the overall group has strong anticipated growth, emerging
countries can have very different situations. Optimal potential securities
appreciation requires a stable political environment, a growing population that
can generate a vibrant future and a productive economy that is flexible, has
liquidity and welcomes foreign investment.
Twenty percent of a portfolio in any one asset class is too
much. Enjoy your recent gains and reduce your holdings to a maximum of 10
percent; diversify holdings geographically by style and by size; hold other
investments that have low correlation with emerging markets; and review your
overall goals to ensure that the group fits with your
purpose.
Marilyn Capelli Dimitroff, Capelli Financial Services,
Bloomfield Hills, Mich.
These economies represent one of
the most exciting growth stories of this decade. The case for committing a
meaningful allocation to emerging markets remains compelling despite their huge
run up and more recent pullback. Because you can tolerate volatility, we
recommend staying the course.
A more fundamental question is whether your 20 percent
allocation is appropriate. While this would be too aggressive for most
investors, your personal financial circumstances might make it suitable for you.
Because you’ve been riding the emerging-markets wave for a few years, this part
of your portfolio has probably become much larger than intended, so rebalancing
to a reduced allocation may be prudent.
Finally, you can better manage risk by diversifying your
emerging-markets portfolio. Consider investing in private equity and
emerging-market debt.
Jim Berliner, Westmount Asset Management, Los
Angeles
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