3 reasons why physicians should love emerging markets

Physicians sometimes fall in love with their stocks but, as a financial advisor, I’ve never seen them carry on an affair with an emerging market mutual fund. That’s too bad. These funds may not be very good looking right now but I expect them to blossom over the long haul. Here are three reasons why I love emerging markets, and physician investors should too:

  1.  Emerging markets are a (relatively) cheap date. If you’re a physician looking for a long term investment in stocks, you may be facing a choice between the US market and international markets. Last year’s huge run up in US stocks and a sell off in emerging markets has widened the gap in valuation between these two options. Relative to US stocks, emerging market stocks are the cheapest they have been in the last 20 years. In fact, emerging market stocks would have to rise about 20% just to get back to their own average valuation levels. Emerging market bonds (as measured by Vanguard’s index fund that invests in these instruments) are yielding nearly 5% while the broader US bond market (again using Vanguard’s flagship bond index fund as a proxy) yields less than half that much.
  2.  Emerging markets are wonderfully volatile. Looking at the Callan Chart (also known as the “periodic table of past investment returns”), physicians can see that emerging markets are usually either the very best or the very worst performing asset class each year, meaning that their prices gyrate wildly. If this were the only asset class you owned, you might hate emerging markets. But for disciplined, diversified investors who rebalance at least once each year, this is a chance to sell some winners and buy some losers. In the long run, this may result in better results (and isn’t “the long term” what this is all about?).
  3. Emerging markets are unpopular. Emerging market stocks and bonds account for at least 10% of all securities issues globally yet I seldom, if ever, see a new physician client who comes into my practice owning emerging market securities. Maybe emerging market stocks and bonds are poorly understood or maybe it’s our inherent “home side bias” as US investors that leads us to overlook and underweight non-US securities. Interestingly—if not perversely—emerging market securities become very popular from time to time, and those times happen to usually be right after the asset classes have been the life of the party, and right before they turn into a pumpkin.

Remember, even though you don’t have to love emerging markets so much that you practically marry them, you do have to take the relationship seriously and plan to stick with it for years, if not decades, to come.