What's Behind the Stock Market Plunge
Absolutely not. The foreign markets represent more than half of the world's market capitalization, so there's still a great deal of opportunity overseas. But the recent slide should serve as a warning for investors to be careful when it comes to investing in the emerging markets overseas.
Unfortunately, the euphoria surrounding the emerging markets is starting to resemble the craze surrounding tech stocks in 1999. For example, according to a study by Hewitt Associates last year, the average 401(k) savers who invested in emerging-markets stock funds last year held more than 16 percent of their money in that risky asset class. And a third of those 401(k) participants held more than 20 percent of their retirement savings in the emerging markets. To put this in context, financial planners suggest that investors should probably keep no more than 5 percent of their money in this risky asset class.
Is there a way to remain fully invested but play some defense?
Yes. The market sell-off drove investors into a classic "flight to quality." So defensive-minded investors may want to stick with high-quality dividend-paying stocks, since the dividend income will serve to stabilize those holdings. Beyond that, market strategists suggest focusing on large-capitalization stocks over shares of small companies. And within the category of large-cap stocks, stick with companies with strong and consistent earnings growth.
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