Emerging market funds invest in stocks of companies located in emerging markets around the world such as China, Brazil, Taiwan, and South Africa.
Emerging markets are quite volatile and are generally considered riskier than international developed. Investors should be careful about overloading their portfolios based on averages alone. While they back test very well, you can see in the chart on the left that they have notably struggled in the last 20 years.
Users of the Withdrawal Rates calculator should also understand that this recent shift towards negative performance contributes to portfolios with high percentages of emerging markets displaying seemingly anomalous long-term withdrawal rates. Performance in the last 20 years is setting new lows.
Emerging market can be a nice asset when used wisely. Study the timing of returns, and invest with your eyes wide open.
- 1970-1987: MSCI World ex USA NR USD, R*
- 1988-1994: MSCI EM GR USD minus 0.3%, P
- 1995+: Vanguard Emerging Markets Stock Index (VEIEX), P
(*) Good EM data is not available prior to 1988 and there’s not enough data to build a synthetic model. I use a world developed (ex US) index as a replacement asset, although it does not follow EM particularly well. As a result, only small doses of EM will avoid setting off the “estimated” tag in the calculators prior to 1988.