Should We Buy Foreign Index Trackers?

The Fool has championed stock-market trackers for ten years, particularly UK ones. Now we consider whether tracking emerging markets is just as Foolish.

I have followed The Fool for eight years, six of those prior to becoming a staff writer. I believe in the advice that The Fool produces, and this is mirrored in all my own financial decisions. Logic shows why it makes no sense to gamble, and so I don't do so. Analysis shows that being loyal to one bank or one insurer leaves you vastly worse off, so I shop around. I save rather than borrow, because I understand that it means I'll be able to buy more stuff in the long run. I track the stock market. The UK stock market. (There are two sorts of Foolish investor: those who track the market and those who pick shares. No one buys funds managed by other people!) But I want to track other, more interesting markets: emerging markets. Now, this is outside the scope of old Foolish principles, so if I do so I will be diverging from our guidance - including my own - for the first time. Is that so bad, you might ask? To me it is, because it is a deviation from mountains of data and tried-and-tested reasoning, which is what the Foolish tracking philosophy is all about. I find myself justifying the idea of investing in emerging markets. Like this, for example: the vast amount of data that we base our reasoning on for tracking the UK market extends back to 1869. Since then, the West has been 'the power' in the world, but now it's likely that emerging markets will become the biggest economic powers. So shouldn't we be investing in them? It sounds plausible, doesn't it? But the more rational part of me says that the growth of China, India, Brazil and the rest doesn't mean that the UK isn't allowed to grow. It's not their 'turn'; it doesn't work like that. In fact, their growth will help us along as well, because they'll buy more of the stuff our businesses make. What's more, it doesn't mean that our stock market won't continue along the meandering but steady course of the fearless mountain climber, as it has done for the past 138 years. (That is, a mountain climber who doubles back sometimes but doesn't climb all the way back down again...Metaphors aren't my forte.) Perhaps I could argue instead that investing some money in foreign markets ensures our eggs are spread amongst different baskets? But that goes against conventional Foolish wisdom too: the FTSE All-Share is diverse already, because it includes tourism, technology, pharmaceuticals, insurance, construction, aerospace, mining, retail, and much else. Furthermore, many of the companies listed in the UK are from emerging markets, or at least they profit from growth in those countries by selling stuff to them. Combine a UK tracker with an investment in property. (Even our own properties are an investment in that the long-term return is we won't have to pay rent or mortgage payments again.) Tracking a UK index and owning your own property gives you extraordinary diversity, thus satisfactorily limiting risks. If I continue to argue for tracking foreign markets, my next point might be that emerging countries have the potential to do astoundingly well. This potential interests me. But where is the data? Where is the history? These markets just have a lot of promise (although admittedly a great deal of it) and hype. But our own UK market has performed well in _ of all the five-year rolling periods for more than 100 years, and 9 times out of 10 over every 10-year rolling period. Emerging markets simply don't have such robust data to look back on. (Rolling periods are, eg. 1931-1935, 1932-1936, 1933-1937 and so on.)Why do we invest? It comes down to this: why do we invest in the stock market? I had this conversation with a colleague yesterday, an American. He agreed that in the US people invest because they're thinking of their long-term wealth: their future and retirement. Here in the UK, my colleague and I agreed that people invest because they want to make lots of money very quickly. The reason most people here don't invest at all (other than because they're ludicrously in debt), is that they don't want to risk their money in order to get rich quick. But the American attitude is much healthier. Investing isn't (only) about getting rich quick. And it's not necessarily about taking big risks. It's about making decent gains over the long term. By investing modest sums regularly in a UK tracker we can expect, over time, to snowball a fair pot of money. If it doesn't make us rich, it should make us comfortable. I will never say that tracking emerging markets (by which I do of course mean to include ETFs) is a poor decision. It's just that we can't justify it using all of The Fool's extensive research into tracking. Some of it, but not all. If we find statistics for emerging markets that are even a fifth as robust as those we have for the UK then investors with my philosophy can justify investing in foreign trackers. The project I have for this year is to see what data there is and, if possible, make a Foolish recommendation to track an emerging market. It won't be easy, not least because quality trackers in those countries are hard to find. Personally, I won't cry if I never invest in anything exciting. > Introducing the index tracker | The Cheap And Cheerful Way To Invest In Shares