Emerging markets can be described as countries that are experiencing rapid economic growth. This is often determined by using the country’s gross domestic product or GDP and per capita income.
Over the past decade, developing economies that fit this definition have been Brazil, China, India, and Russia.
Emerging markets or economies offer investment opportunities and a chance to diversify your retirement portfolio. But there are also risks to consider when trading in these markets.
The primary advantage of investing in such countries is the fact that there’s a significant potential for high growth.
Another advantage is the opportunity to diversify your portfolio and add some international investments. When there is an economic downturn in one country, it can be offset by growth in another.
But managing this is not for a beginner as you have to consider different variables that can impact the financial outcome of your investment.
Not only will you need to follow the company that you’re investing in, but also the social and political climate that can have a far-reaching impact on your investment. Further, things can change rapidly while you’re asleep.
As stated before, there’s significant political risk. These countries may have volatile and unstable governments. So a single decision can throw the economy into chaos.
There is also an economic risk as these markets usually face problems with the lack of raw materials and insufficient labor. As a result, these variables can present very real challenges to investors.
There is a currency risk as emerging market currencies tend to be highly volatile when compared to the U.S. dollar. So investment gains can be easily lost if the currency is devalued significantly.
Having said all this, it’s still a good idea to invest in emerging economies as if offers another investment channel. The great recession taught us that it can reap huge rewards to look outside our own shores when our economy was taking a beating.
So whether you’re planning your retirement or looking for new opportunities, emerging markets will always pop up as a good investment opportunity. At the same time, it’s not straightforward, so it’s not really the best option for beginners.
So if you’re a novice and want to invest in growing economies, seek advice from your financial planner or stock broker before proceeding to invest in foreign markets.