Your well-diversified portfolio might not be what you think it is.
Chances are it doesn't contain enough investments in emerging markets — generally those places with low to middle per capita income outside of developed countries such as the U.S., Canada, Japan and many countries in Europe. This is because diversification has traditionally meant including among your investments some stocks from large, developed countries beyond our borders.
This might not be good enough anymore. The global economy is changing fast, and you might need to alter your mix if you want your portfolio to keep up.
Driven by globalization, urbanization, advances in technology and aging populations, the world is seeing an accelerating shift in wealth from west to east, according to Richard Dobbs and James Manyika in their fascinating 2015 book, "No Ordinary Disruption: The Four Global Forces Breaking All the Trends." The world's center of economic gravity — a rough measure based on each country's wealth and location — is moving east toward China and other emerging markets faster than ever before.
For instance, the increase in productivity in China in recent years has occurred at a pace 10 times the speed and 300 times of the magnitude of England's productivity during the Industrial Revolution in the 19th century, the authors said. Urbanization is also improving health and education at record speed. At the same time, the internet and technological advances allow the rapid sharing of knowledge around the world like never before.
These economic trends suggest that the emerging markets of the world will continue to be places where much wealth is created and that participating in their stock markets will be a wise long-term decision. The many mutual funds and exchange-traded funds that invest in emerging markets using both active and passive management strategies make the process relatively simple.
Investors should have a significant amount of their investments in emerging markets — but how much of any given portfolio depends on each investor's situation. Younger investors might be best positioned for significant exposure to emerging markets.
While some analysts have said that investing in the Standard & Poor's 500 index gives adequate exposure to global industry, it's no longer clear that this holds true in a world in which the economic center is not in the West. Talk to your adviser about whether you have a piece of this rapidly changing world.
Steven Podnos, a fee-only financial planner and principal of Wealth Care LLC, wrote this column for the financial website NerdWallet.
