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Wednesday, May 9, 2007

How Not to React to Market Volatility



No doubt that emerging markets are a volatile asset class. In our opinion it belongs in most portfolios’ equity allocation, but in a percentage appropriate to the investors’ risk tolerance. Unfortunately, it seems most investors check short term performance. Thus the following investment flows into emerging market mutual funds:

2005 $20 bln in inflows (13.5% of all mutual fund inflows)

January 2007 $2.6 bln inflows

February 2007 $ .8 Bln in inflows

March 2007 $2.3 bln in outflows

A glance at the chart at the top of the page of the emerging market index exchange traded fund (etf) for the past 2 years shows clearly that investors were more performance chasers than asset allocators, bailing out after the 20% drop in February and missing out as the market fully recovered and turned positive in the following 3 months. Year to date emerging markets are outperforming the US market. Note the extremely high volume (lower scale) coinciding with each major selloff in the emerging market etf (no doubt sparked by panic selling)

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