I always find it amazing how little you hear in the news and other media about asset classes with recent poor performance. Asset classes like gold and emerging markets had a rough year last year, especially in comparison to US stocks. But that’s exactly the reason you may have bought them in the first place.  In my February column for Physicians Money Digest, I write about why I’m going to be buying some more Emerging Markets stock with this month’s 401K contribution.

People are apparently pulling money out of emerging market (EM) stocks like crazy. As of the end of January, EM funds had 13 consecutive weeks of outflows—the longest losing streak in 11 years.While there is some data supportive of momentum investing, this seems a whole lot more like the old buy high/sell low behavior that smart investors are supposed to be avoiding. A review of the historical records supports this.There were heavy outflows in 2008 and 2009, just in time to miss the 78% returns in the last 3 quarters of 2009 and the 19% returns in 2010. By the beginning of 2011, inflows were quite positive (I wonder why), and EM lost 18% that year. By the end of the year, money was flowing out of the fund, just in time to miss the 18% return in 2012. Now, with EM losing 4% in 2013 (while the S&P 500 returned over 30%) and another 4% so far in 2014, is there any surprise that money is flowing out like a fire hose?This is classic performance chasing: a childish way to invest and the reason why investors underperform the funds they invest in by such a large margin. In fact, the more volatile the fund, the greater the difference between the returns of the fund and the returns of the investor’s dollars in that fund.

EM is a volatile asset class, but I’m buying, not selling, for four different reasons.

1. Emerging Markets are a good investment
EM stocks (think China, Brazil, India, South Africa, Russia, Mexico, Malaysia and similar countries) have provided solid returns for decades.

The Vanguard Emerging Markets Index Fund, my vehicle of choice for this asset class, has an annualized return of 6.7% per year for the last 20 years, enough to turn a $100,000 investment into $366,000. Returns for the last 10 years have been 9.3%, about 2.5% better than the US stock market.

Insuring-Income-250x250-bannerAlthough the future is impossible to predict, especially in the short term, long-term future returns also look bright for this asset class, according to experts like global investment firm GMO, which predicts 6.8% annualized, after-inflation returns over the next 7 years, and Forbes columnist Rick Ferri, who predicts 7% returns after inflation over the next 30 years.

By comparison, their predictions for US stocks over those time periods are -2% and 5% respectively.

Clearly, EM stocks have a place in the portfolio of the long-term investor.

Read the other 3 reasons here, then come back and comment. Do you hold EM in your portfolio?  Why or why not? What do you think of their recent underperformance and possible future peformance?