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Invest in China and Latin America

Chris Farrell Jul 12, 2010

Question: I’ve started a Roth IRA for each of my 2 sons (21 and 23) with what they earn each year. Not very much since they’re in school, but one has about $5000 and the other about $3000 so we’re finally above the $2500.00 minimum most mutual funds require. I’ve looked at index funds, but those based on the U.S. market (S&P 500 etc) compare poorly to some international funds. I’m thinking of two international funds China and Latin America for one son and China for the other. What are your thoughts? Too risky? Brad, Farmington Hills, MI

Answer: Risk is in the eyes of the investor. It also depends on what you’d like to accomplish with the investments. I would lean toward creating a more diversified global portfolio–that would include U.S. equities–if you wanted to help them establish a strong foundation for their retirement more than four decades from now. Diversification pays over the long-haul.

But there is nothing wrong with making a reasoned speculation on the long-term prospects of China and Latin America.

Again, the risk is more concentrated. Are they and you comfortable with that?

After all, emerging markets offer a good value for the long-term investor for one big reason: They have years of fast economic growth in their future. Once in a great while a trend takes hold that’s so powerful that it transforms the entire global economy, such as mass production in the 19th century and the emergence of cheap computing and communications in the 20th century. The latest megatrend has been the rise of the emerging markets, including Brazil, Russia, India, and China (the four largest developing nations).

At the same time, it won’t be an easy ride into the future. There are a lots of risks associated with investing in emerging markets. Accounting standards are weak and economic information poor. Political instability and government corruption are a fact of life in many markets. And investors are increasingly concerned about China’s short-term prospects (there is much greater confidence long-term). The Chinese authorities are grappling with how to slightly cool off a speculative boom and bring down inflation while avoiding a recession and boosting worker wages.

Still, for long-term investors the strategy that makes the most sense in a global economy is a global one. It’s a reasonable bet. I would choose (and have chosen myself) to invest in a diversified emerging market index fund rather than focus on one country and one region. But there is nothing inherently wrong with the choice you’re making either.

One other thought: What do your sons think of the investment strategy?

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