3 Reasons Emerging Markets Are Best Left to the Pros

The term "emerging markets" refers to the economies of developing countries that have demonstrated significant economic growth. They have the potential to become developed countries. Any investor who invests in emerging markets has a potential to profit handsomely. However, this is not something that should be attempted by just anyone. Navigating emerging markets requires professional experience and skills that you may not possess. If you are a new investor and don't have an experienced professional working with you, you are probably better off investing in safer markets.

Understanding Emerging Markets

Developing countries are countries that share certain economic features with developed countries but whose economies are not fully developed.  Emerging markets are in developing countries that have demonstrated significant economic growth and revised their laws to make their financial institutions more efficient, accessible and investor-friendly. Investment information sources don't always agree on which developing countries have emerging markets, so investors have to decide for themselves which index to follow.

Investing in emerging markets operates under the theory that a growing economy and more investment-friendly laws open developing countries to more foreign investments, which fuels further economic growth. These economies are expected to grow eventually to the point where they become fully developed countries, and anyone who has had the foresight to invest in them will earn significant profits. 

There are a number of reasons professional investors are better equipped to handle the challenges of emerging markets. They include the following.

1. Professional Investors Have More Capital

In order to become developed countries, developing countries have to overcome many challenges. The fact that they developed emerging markets shows that they have taken steps in the right direction, but it doesn't mean that they don't have to face some lingering issues. These includes inadequate infrastructure, pervasive corruption, limited exploitation of existing resources and political instability. Those factors slow down economic growth and make the markets more vulnerable to fluctuations.

Anyone who invests in emerging markets has to be ready to invest for a long haul. Investors need to have enough money to weather low returns and losses. As a new investor, you probably don't have that kind of capital. Furthermore, professional investors have more time to invest their money elsewhere, which helps to mitigate their losses.

2. Professional Investors Have More Experience

Because the emerging markets are more volatile than many other investments, the investors need to be able to read the markets carefully. They need to be able to tell the difference between a temporary slowdown and outright economic collapse. Professional investors have experience reading emerging markets, and most have had time to learn from their mistakes. While their judgment isn't foolproof, they are far more likely to be right than are new, amateur investors.

3. Professional Investors Have More Resources

As a new investor, you have to start from scratch. You will need to be able to research the emerging markets by yourself, and you will need to be able to keep track of the emerging market trends. Professional investors, by contrast, can hire people to handle those responsibilities. They can also draw on more resources. The longer they have been investing, the more likely they are to know some of their fellow investors, as well as bank officials, government officials, company owners and so on. In other words, they have more people who can supply information that allows them to make better investment decisions. You are better off building up your resources slowly while focusing your investment strategy on something safer.

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