We'll move outside the usual national business media today to note this article on market bubbles from Money Magazine, the latest in our ongoing series of bubble watching by the business/financial press.
Senior Editor Walter Updegrave takes a look at the hot money flowing into emerging markets, high yield bonds and (yes!) gold, and cautions his readers to tread lightly when the party seems to be going a little too well.
And indeed, given how we've careened from one bubble to another over the past decade -- technology shares to Internet IPOs to residential and commercial real estate to mortgage-backed securities -- you can't help but wonder which investment we'll next infuse with unrealistic expectations that will eventually give way to bitter disappointment and big losses.
However, what makes this article stand out is that it is not just about pointing to the most successful investments of the year and calling them out. He also acknowledges that these frothy investments need to be part of balanced portfolio and goes on to suggest how to protect a portfolio from the worst impact of a bubble bursting.
His three-step strategy is simple, watch for hot investments to revert to the mean, diversify your holdings and rebalance to keep the hottest performers from overwhelming the portfolio.
Addressing a specific question about emerging markets, he delivers the clarity you expect from Money, whose mantra is to help its readers make money.
So to answer your question, I think investing in emerging markets funds can be a good idea if you're doing it for the right reason (more diversification) and the right way (small portions that are part of a long-term asset allocation and rebalancing strategy). That said, I don't think anyone should feel compelled to add emerging markets funds to his or her portfolio. You can do perfectly well without them.
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