As Funds Flow Into Emerging Markets, Volatility Tests Investors’ Ability to Buy and Hold
August 17, 2016
Markets can be volatile, and that volatility can test an investor’s ability to buy and hold. This is true of investing in established U.S. markets and it’s also true of investors in emerging markets. Investors who sell when they’re uncomfortable tend to have unfortunate timing—selling at a market’s bottom and missing when the markets rally.
Peak Selling at Market Bottoms
Figure 1 tracks the growing investment, via mutual funds, in emerging markets since 1993. In February 1993, the first month Morningstar began reporting Diversified Emerging Markets category net flows, $39 million was in funds whose benchmark was the MSCI Emerging Markets Index.
The blue bars in Figure 1 illustrate the buying and selling patterns of investors, represented by the estimated net flows into what is now a $267 billion1 category. The green line illustrates the jagged ascent of the index. As can be seen at multiple times over the last 20-plus years, those who took part in peak selling at market bottoms were largely absent from rallies that followed.
The Risk of Timing Emerging Markets
An investor should remain invested in order for a portfolio to benefit from exposure to emerging markets. As Figure 2 illustrates, efforts to time emerging markets could prove costly. An actively managed solution, which enhances a portfolio’s diversification and potentially decreases exposure to market volatility, may help clients remain invested through full market cycles.
Source: Morningstar Data ranges from 1/1/1996 through 12/31/2015. Past performance is no guarantee of future results.
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Past performance is no guarantee of future results. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice. Morningstar Diversified Emerging Markets Category is comprised of funds with at least 50% of stocks invested in emerging markets. The MSCI Emerging Markets Index represents large and mid cap companies in emerging markets countries. Unmanaged index returns assume reinvestment of any and all distributions and, unlike fund returns, do not reflect fees, expenses or sales charges. Investors cannot invest directly in an index.