US stocks have dominated for the past decade, while emerging markets have struggled to keep up. It’s tempting to think that whatever has performed best recently will perform the best forever, but smart investing means building a portfolio that can handle whatever comes next.
This underperformance has led some investors to wonder if emerging markets are worth having at all. We think that’s the wrong question. We believe they still have an important role to play.
Why we still like emerging markets
Emerging markets should give you better returns over time than developed markets. The reason is simple: they’re riskier places to invest. Higher risk means investors demand higher returns to compensate.
This has worked historically. Since July 1989, emerging markets have beaten developed markets by around 0.7% per year. It doesn’t sound like much, but it compounds over decades.
These returns don’t arrive smoothly. If they did, you wouldn’t need developed markets. Emerging markets swing up and down more than developed ones.
Sometimes they’ll drag your portfolio down. Other times they’ll boost it. The chart below shows how much they’ve moved around. The investors who stick with them through both periods usually come out ahead.
Why diversification works
When you spread your money across different types of markets – developed and emerging – you protect yourself from any one area doing badly.
You’re not relying on just one region or type of company. You’re more likely to capture good returns wherever they happen.
Diversification helps with two big emotional challenges: the fear of missing out on the next big thing, and the regret of backing the wrong horse. The chart below shows this perfectly. The global portfolio (the lime green squares) never delivers the highest returns in any year, but it also never delivers the lowest. It stays consistently in the middle while US stocks, emerging markets, and other developed markets take turns being the best and worst performers.
Our view
Emerging markets haven’t been the stars lately. That doesn’t change why we think they belong in your portfolio.
They should give you better returns over time. They help spread your risk. And they give you exposure to the world’s fastest-growing economies.
Sticking with them through the tough patches isn’t easy. But it’s usually worth it.
At Emery Little, we believe in building portfolios that can weather different market conditions rather than chasing recent winners. Our approach focuses on long-term evidence and diversification principles, even when that means holding investments that aren’t currently in fashion. f you’d like to understand more about how we think about investing or discuss how this applies to your own portfolio, please get in touch.
This is for educational purposes only. It’s not personal advice and we’re not recommending any specific investments. Everyone’s situation is different, so what’s right for one person might not be right for another.
