Sunday, August 12, 2007

Good Advice on Emerging Market Shares

It is a pretty good bet that emerging markets will have higher economic growth rates than the US, but that doesn`t necessarily make their stocks a good investment. Here is a clip from Jason Zweig of Money, who wrote the commentary for the latest version of The Intelligent Investor that I read, which was excellent. He ends with a recommendation I certainly agree with.


Second, it doesn't matter how glorious the future turns out to be if you paid too much for your piece of it. Emerging markets stocks sell for an average of more than 16 times their net profits, while U.S. stocks trade at around 17 times earnings.

That gap is seldom so narrow, and when it is, emerging markets usually end up getting hammered. That's because they should be cheaper.

The U.S. government, whatever its faults, doesn't confiscate industries or create inflation so severe that you need a wheelbarrow full of money to pay for a loaf of bread. Russian president Vladimir Putin isn't shy about jailing critical CEOs and busting up their companies. The next stock he seizes may be one your fund owns.

I'm not saying you should bail out. As an enduring part of your portfolio, emerging markets are a great way to hedge against the hazard of keeping all your money at home; when the U.S. zigs, emerging markets tend to zag. If you invest patiently over time, you have little to worry about.

But there's a big difference between owning and buying. Owning an emerging markets fund permanently makes all the sense in the world. Buying one today - plunging in for the first time - does not.

Emerging markets will go on sale soon enough; the time to buy is when the headlines turn bleak and your friends stop bragging about how much money they've made in China.

When that day happens, buy a cheap index fund like Vanguard Emerging Markets Stock (VEIEX (Charts), iShares MSCI Emerging Markets (EEM (Charts) or Vanguard Emerging Markets (VWO (Charts).

Until then, if you want to jump into the developing world, book a vacation to Rio.

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