What should investors know before investing in emerging and frontier markets?
LARRY ZIMPLEMAN: First, it might be worthwhile to establish the difference between emerging markets and frontier markets. Emerging markets are countries like Brazil, Mexico, Malaysia and China. There is no universal definition of frontier markets, but they would be countries that are in even earlier stages of economic development. Examples might be Colombia, Peru, Pakistan and Mongolia.
If you were going to consider frontier markets, I would recommend doing so through a mutual fund with a decent track record (i.e. three years). This will provide a better level of diversification and might cushion the ride a bit. For emerging markets, they should likely have a place in your asset allocation, but probably with an allocation that is in the 5%-to-10%-of-assets range. Again, you would want to try to diversify across several emerging economies in different continents. Both emerging and frontier markets offer above-market returns but come with a significantly higher level of risk.
Larry D. Zimpleman is chairman, president and chief executive of Principal Financial Group.