South Korea’s stock market gives ambitious investors options to diversify away from the U.S. equities market. That said, investing in foreign markets, especially in Asia, is not for those with weak stomachs.
Fast-growing economies, like South Korea, are fertile ground for aggressive companies in the right industries. If you’re in the construction business in China you’re set! If you’re a tech firm in South Korea… again, you’re in the right spot.
Investors willing to hunt these companies down and pour through research can earn outsized returns. But it’s always a bumpy ride when investing in developing economies.
Take a look at South Korea’s stock market, shown below in orange. I’ve included the Dow Jones Industrial Average, in green, for comparison.
As you can see, South Korean stocks made bigger gains in 2010 and the first half of 2011. Stocks there rose about 38% from trough to peak. Meanwhile, the Dow Jones made gains of about 28%.
But when the first significant selloff came in mid-2011, South Korean stocks were hit a lot harder than those in the U.S. This is typical of high-beta (a.k.a. volatile) foreign stocks. Bigger gains on the way up. Bigger drops on the way down.
This is one reason why a simple “Buy and Hold” strategy can be a dangerous pursuit in foreign markets. Instead of staying invested for years at a time, investors in these markets can do better by following cyclical turns. The goal is to be a buyer when the global markets are in “risk on” mode and to exit foreign markets during “risk off” periods.
Regardless of the approach, exposure to markets like South Korea can help investors diversify and gain exposure to above-average growth.
If you haven’t done so already read the Survive & Prosper issue on “Steps to Prosper in this Debt and Financial Crisis.”