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Investing Specialists

The Error-Proof Portfolio: Economic Growth Doesn't Equal Portfolio Growth

It's all about the valuations, folks.

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My Error-Proof Portfolio column is dedicated to helping you avoid common investing mistakes. Well, now it's time to share a mistake of my own. One of my first mutual funds, which I purchased in the 1993, was an emerging-markets fund. Never mind asset allocation, never mind the diversified starter funds such as  Vanguard STAR (VGSTX) or  Dodge & Cox Balanced (DODBX) that I often recommend. Tales from college friends traveling in Asia and Latin America had made me a true believer in the growth of emerging markets.

On its face, the decision to invest in emerging markets wasn't a mistake at all: Although emerging markets stocks have advanced in fits and starts during the past decade and a half, they've dramatically outpaced developed-markets firms. And had I bought and held my emerging-markets fund, I would be gloating now. But I didn't hold. When the Mexican peso crisis roiled Latin American stocks in 1994 I started getting nervous. And when the Thai baht devaluation and Long-Term Capital Management crises hit in 1997 and 1998, respectively, prompting huge losses in emerging-markets stocks in those years, I decided I didn't want a dedicated emerging-markets investment after all.

That tale of investing stupidity illustrates one of the key mistakes investors make when investing internationally. They confuse a great story--the prospect of torrid economic growth in a given market--with the actual investment.

Christine Benz has a position in the following securities mentioned above: NEWFX. Find out about Morningstar’s editorial policies.