I'm in London today and you can feel the uncertainty as flat panel TVs are all tuned to networks watching for news on Korea and the resulting damage to the markets.
It's been quite a week for the United Kingdom as geo-political tensions rise in Asia and Ireland struggles under massive debt.
Yes, we are global investment community and news far and wide impacts markets around the world.
Investing in emerging markets is a strategy that makes sense if one is seeking to grow assets at a higher rate of return compared to struggling economy burdened by high deficits, high unemployment, and other structural problems. I am confident that over the next 10 years emerging market returns will significantly outpace more established economy equities. But there is a cost for bigger gains.
The news from Korea today highlights that emerging markets do have risks that one needs to be aware of including tensions between neighbor countries, political instability, and currency challenges. The road to higher returns is paved with higher risk to be sure. Higher returns comes with higher volatility.
So as an investor, what are you to do when these situations arise? When news breaks that impacts markets you are wise to ask yourself the following questions:
- Is the news of the day lasting in it's impact and will it structurally change growth prospects of a given investment?
- Is the market reaction appropriate across all regions and is there a contagion overreaction that provides an investment opportunity?
- Do current events provide the opportunity to reallocate resources across equity classes, either to avoid significant downside risk or to take advantage of any potential overreaction?
The world of investing is paved with opportunities for success but also pitfalls that must be assessed on an ongoing basis. Too often investors fall in love with potential returns and discount the risk. It happened with the dot com bubble in 2000 and the housing market for the last 5 years.