CTMPR

Emerging Markets were the single best place to be from the lows in late 2002 through the top in 2007. In fact, the Brazil ETF – EWZ for example went up a whopping 1200% from 10/2002 – 5/2008 which is absolutely unbelievable for a stock market index. After performance like that many people believed that the only place to be for growth is in the emerging markets. You can see why when you look at this comparison to the S&P 500 ( the S&P 500 is that flat line ).

However, when the down turn came the emerging markets were hit harder than the developed markets so anyone who was late to the party had to endure an incredible amount of pain. In general, the markets or stocks that have the most upside potential are often the same ones that have the most downside potential. These types of investments are known as “High Beta” and even though they can be a valuable part of your portfolio, you need to understand how to manage the risks.

The second half of 2010 was good for emerging markets they had an improving world economy and relatively low interest rates which is a perfect environment. This combined with a flood of liquidity from the Federal Reserve provided plenty of fuel for them to rally. However, 2011 has been a different story so far as soaring food prices and commodity costs have caused problems for emerging countries. The problems stem from the fact that citizens of emerging markets spend a much higher percentage of the income on food costs. With food costs reaching all time highs, these relative poor consumers are feeling the strain. Most of the emerging markets have given up all the gains from the second half of 2010 and are now testing support levels.

The key to success in the emerging markets is to keep them a relatively small portion of your overall portfolio and avoid making emotional decisions. Setting up a proper Asset Allocation Model and re-balancing your portfolio at least annually is the best way to manage your risk.

The following is just an example of what an asset allocation model might look like, it’s not necessarily right for you.

30% U.S. Stocks ( 50% Large Cap – 50% Small Cap )
30% Foreign Stocks ( 60% Developed – 40% Emerging )
10% High-quality Corporate Bonds
10% High-yield Bonds
10% U.S. Treasury bonds (TIPS)
5% Real estate stocks
5% Gold and precious metals

Then at the end of each year (quarterly or even monthly) evaluate your portfolio, selling some of the assets that have inflated and buying the ones that make up a smaller percentage than they should. By doing this you tend to sell over valued assets and purchase under valued ones. When it comes to choosing your investments it may also be valuable to use ETFs like an emerging markets etf instead of trying to choose which individual countries to invest in. The whole point is to take as much of the guess work as possible out of the equation.

With the recent pull back in Gold and Silver the upside action has been in the Short Gold ETF – GLL. In fact, in the past month it’s up over 17% at the time of this writing. GLL is actually a double short gold etf so when gold is down 2.2% today it actually produces a 4.4% gain in GLL.

There is also a short gold ETN – DZZ with is an exchange traded note but has the same exact relationship to gold and is trading up 4.4% today as well.

The short silver etf – ZSL is even performing better since the turn of the year up around 30%.

30% might sound like a huge gain in only a few short weeks but all you have to do is pull up a 1 year chart to put things in perspective. You can quickly see that ZSL was absolutely pounded throughout 2010 falling from a peak at $60 all the way down to below $10. So it was about time for a bounce to occur. The 200 day moving average for SLV doesn’t come in until we reach $22 so that’s going to be long term support for silver.

When I first became familiar with Health Savings Accounts it immediately made sense to me. Get a higher deductible health insurance plan ($1200+ deductible) and set aside the money you save on premiums in a tax advantaged savings account. If you have health care expenses that fall under your deductible, use the money in your health savings account. If you have money that you didn’t use at the end of the year it rolls over into the next year instead of losing it like a flex plan. In fact, most HSA custodians now offer investment options once your account reaches $2500 so you can treat it like another retirement account.

Additionally, there is a 20% penalty for using the money for non-medical purposes prior to age 65 but those disappear once you hit medicare age. In other words your Health Savings Account can be an additional source of retirement funds if you live a fairly health lifestyle and didn’t need to use all of the money you contribute. My wife and I don’t go to the clinic much except for our (free) annual physicals and to take our children in when they are running fevers etc. Therefore, after 3 years on the plan we have an extra $6000 sitting in the account. Her employer contributes to our plan each month in addition to our contribution so we contribute the maximum on an annual basis. Not only are we saving a tremendous amount of money that previously went to the insurance company, but we have this pool of money that will most likely continue to grow for the next 20 years.

Obviously when there are medical issues, the money will be used properly. However, if we continue to take care of ourselves there is a great chance that it will be an extra pot at the end of the rainbow. Since it grows tax deferred the entire time, it’s a great way to divert some cash from the insurance companies pocket into your own!