“So tell me what you want, what you really really want…” — Spice Girls’ “Wannabe”
Last August, I created my Gold Star Portfolio — a collection of low-cost mutual funds that have demonstrated exceptional long-term performance. I identified good funds for four major categories of asset allocation:
- U.S. Large Cap,
- U.S. Small Cap,
- Foreign, and
- Bond.
Improved diversification
A healthy diet includes the four basic food groups, but also a range of foods within each group. For example, carrots are great for you, but you should also have green leafy vegetables, too, like swiss chard.
Similarly, a healthy portfolio diversifies each category into a range of investments. For example, in the Foreign section of your portfolio, you might want to have some exposure specifically to emerging markets as well as the more industrially developed nations.
Emerging markets are countries that are undergoing tremendous growth, especially in the creation or expansion of a middle class. Think China and India. They also have the tendency to fall apart due to political instability and can have relatively immature financial markets with currency fluctuations and less-than-transparent business transactions.
I recently wrote about different ways you can invest in the so-called BRIC-nations: Brazil, Russia, India, and China. But to cover the broader emerging market category, I want to also look beyond these four nations.
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