Because of their boom-and-bust cycles, emerging markets suffer mispricing which leads to cap-weighted indexes for large positions in overpriced stocks and smaller positions in underpriced stocks. So the prudent investor will need to find the balance between price and portfolio weight.
A savvy investor will gather bargains for the long-term investment, say Arnott and West, such as current emerging market stocks, and place them in a diversified portfolio consistent with one’s time horizon and risk tolerance.
For our own part, we’ll continue to use an entry strategy implementing the 50-day moving average.
Most funds are far below the 200-day moving average, meaning it would be a long wait before a signal to buy is reached. We haven’t been so far below the long-term trend lines in decades. As a result, we have a short-term plan for getting back into the markets if the rebound is real:
- When a fund crosses above its 50-day moving average, put 25% of the value of your portfolio.
- When the fund goes up 5%, put another 25% in.
By the time this happens, the 200-day moving average should be well within sight, and things should begin operating in line with our normal buy parameters once again.
