In a recent note to investors, Wells Fargo analysts mentioned that they recommended avoiding emerging market equities right now.
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Since the massive bank holds a weighty opinion, it’s worth digging into their suggestion. GOBankingRates unpacks Wells Fargo’s recommendation and what that means for your portfolio.
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Why Is Wells Fargo Warning Investors Off Emerging Markets?
Investing in emerging markets allows investors to diversify their portfolio beyond U.S. stocks. While you can target specific emerging markets, like India or Indonesia, opting to purchase an index fund focused on a broad swath of emerging markets can give you some exposure across multiple economies with minimal effort on your part.
For example, the MSCI Emerging Markets index offers a popular way for U.S.-based investors to add exposure to emerging markets to their portfolio. In the last year, the MSCI Emerging Market Index saw a net return of 13.04%, which is significantly higher than the S&P 500, which saw a slight decline.
While you might think that the outperformance of the MSCI Emerging Market Index over the S&P 500 would warrant investing more heavily in emerging markets, the opposite is true in Wells Fargo’s opinion. Since the MSCI Emerging Market Index did so well in the last year, the analysts recognize that many investors who had invested in emerging markets will have seen their portfolio’s composition change over the last year, with perhaps more weight in emerging markets than they would like.
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The possible portfolio imbalance, with too much money invested in emerging markets and not enough in U.S. stocks, could represent a problem for some investors. Additionally, Wells Fargo remains unconvinced it’s a good idea to stay so heavily weighted in favor of emerging markets.
The note pointed to the structural risks of emerging markets, including “political and economic instability, corporate governance concerns, variable regulatory risks, as well as China’s excessive debt, slumping property sector, and slowing growth.”
All of this to say, Wells Fargo’s note encouraged investors to rebalance their portfolios more heavily toward U.S. stocks instead of emerging markets.
Why Wells Fargo Suggests You Buy U.S. Stocks Instead
In the statement, Wells Fargo said, “we favor reallocating to U.S. Large Cap, U.S. Mid Cap, or Developed Market (DM) ex-U.S. Equities to maintain overall equity exposure.”
Investors heavily weighted toward emerging markets might sell off some of those investments in order to purchase U.S. stocks. For example, you might sell some of your stake in the MSCI Emerging Markets index in order to buy more in a fund tied to the S&P 500.
What To Do With Your Own Investment Portfolio
If building and managing your own investment portfolio, the right strategy varies based on your interests, skill level and time commitment. For investors with significant time and the patience to monitor the constant turns of the stock market, actively managing it could be a good idea.
But if you are looking for a more hands-off approach with a long-term vision in mind, consider buying and holding low-cost index funds. As you buy and hold index funds for the long term, you can make big-picture changes to your portfolio, like adjusting toward or away from emerging markets occasionally. But, in general, you’ll allow the investments to hopefully grow in value over the long term.
Takeaway
Wells Fargo is suggesting that investors shift away from emerging markets toward U.S. stocks. For some investors, the shift could make sense. For others, following through on this change wouldn’t align with their investment goals. Take the time to decide what’s best for your situation before making any changes to your portfolio.
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This article originally appeared on GOBankingRates.com: Wells Fargo Says To Avoid This Investment and Buy US Stocks Instead — Should You Invest?
