For starters, let’s define what we mean by “emerging markets”. Emerging markets are developing economies (e.g., China, India, Brazil) as opposed to developed economies (e.g., Canada, Japan, the UK). Emerging markets are known for having cheap labor and producing products much less expensive than what they would cost if built in the U.S. When you walk into Walmart to buy a manufactured product, odds are it was produced in an emerging market country.
Most mutual fund companies offer funds that specialize in emerging market companies. If you’ve been invested in an emerging markets stock fund the last decade or so, you’ve probably been disappointed. Returns for the 10-year period ending in December, 2024 averaged just under four percent. Meanwhile, over that same 10-year period, the U.S stock market averaged better than 12 percent a year!
That’s enough to make you want to cut and run on emerging companies. But hopefully you didn’t bail out. U.S. stock markets had a good year last year, with a return around 17 percent. But emerging markets did even better, returning a little over 30 percent! That 2025 stellar return doesn’t make up for a decade of underperformance for sure. But it does put a dent in it. And it’s not the first time that’s happened.
Let’s roll back to the first decade of the 21st century. Suppose you invested $1,000 in the S&P 500 index on January 1, 2000. It’s your first time ever investing in stocks. You’ve heard stocks average a 10 percent return annually. You leave it alone for the next 10 years. Finally, on December 31, 2009, you look at your account. At a 10 percent rate, you’re expecting to see a balance of around $2,600. In fact, the balance is barely over $900! What happened? Well, that decade opened with the dotcom bubble, where technology stocks crashed by around 75 percent! The decade ended recovering from the 2008 Great Recession, where stock values in the U.S. had been cut in half. The period 2000-2009 is often referred to as the Lost Decade. And it certainly was a lost decade for U.S large cap stocks.
So, did any areas make money during that decade? Yes, in fact, several sectors did, including bonds at 6 percent, real estate trusts (REITs) at 10 percent, U.S. small cap stocks at 8 percent, and emerging markets at 13 percent! All figures stated in annualized returns. The “lost decade” was not lost at all for a globally diversified portfolio.
You’ve heard the phrase “don‘t put all your eggs in one basket”. Given the randomness of market returns, a corollary to that would be: Put a few eggs in ALL the baskets! And be patient! One more thing: let’s go back to that first time investor in 2000 who lost money for that decade. If he stayed put the next decade, the S&P averaged 13.6 percent per year! Patience rewarded!