Investors Beware: Don't Fall For Wall Street's Latest Bait-and-Switch Pitch

Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

Here's a warning to investors. There's a new term you're going to hear a lot about in the coming weeks: "Frontier Markets."

Regard the term - and the investment strategy behind it - with substantial caution.

Here's why.

When it comes to Wall Street, the worse the markets around the world behave, the more you're going to hear about potential "alternatives."

Travel back about 10 years and it was the so-called "emerging markets," including Hong Kong, Singapore, Taiwan and Malaysia. Then came the "BRICs" - Brazil, Russia, India and China.

Now the "alternative markets" du jour are the frontier markets.

These are places like Namibia, Bangladesh, Pakistan, Romania, Vietnam, Morocco, Cyprus and Nigeria, for example. These markets aren't exactly paragons of geopolitical stability anymore than they're economic security.

Even so, the Big Boys read that to mean Wall Street's insiders are starting to talk them up as having BRIC like potential.

And with good reason. The Standard & Poor's Frontier Markets Index reflects an annualized return of 37% over the last five years, which is better than the Morgan Stanley Capital International Global Emerging Markets Index (MSCI GEM) and a whole lot better than the Standard & Poor's 500 Index, especially lately.

Sound appetizing?

Think again. You've heard this song before.

Despite the fact that Standard and Poor's, Morgan Stanley (MS) and, most recently, Merrill Lynch & Co. Inc. (MER) all have created frontier indices of their own, investing in them is largely limited to institutional investors. Save for one tiny (and expensive) frontier fund from T. Rowe Price Group Inc. (TROW), there is no easy way in for individuals. But that won't stop the Wall Streeters from telling you all about it - especially as U.S. market conditions continue to worsen.

Why? Because it's in their interest to keep you interested. They generate fees - lots of fees - by holding onto your assets, meaning they have a lot of "skin" in the game here.

You bet. But it's true, nonetheless.

By the time somebody creates an exchange traded fund (ETF) and makes it available to individual investors who want to get their feet wet in the frontier markets, the institutions that are enjoying everything the talking heads will tout in their glowing reports will unload those holdings and rebalance their portfolios using the flood of money from individual investors to do so.

This will once again potentially leave the little guys like you and me on the hook in unstable, untested and uncorrelated markets. There's a relative lack of regulation and corruption rampant in these markets. So are the risks related to political instability, currency devaluation and a near complete lack of research data on the companies, or the markets.

If you ask me, this sounds a lot more like a recipe for indigestion than a strategy for market-beating investment returns.

So what's an individual investor to do? Here are three simple rules that will keep you on the investment-profit pathway:

  • Don't Chase Performance: You will hear a lot about these markets in the near future and the numbers you'll hear will make it very tempting to make a play. But don't do it.
  • Keep it Sane: If you can't resist buying in, we don't blame you. But at least make sure that your exposure to the "frontier markets" is kept within reason. That way you won't get burned too badly when these volatile markets retrench - as they will. That's when we'll be buying in, because by that time we'll be able to base our decision on stability, and not speculation.

In conclusion, it's important to remember that even though going global is an absolute necessity in today's markets, it's not a license to be reckless - no matter what Wall Street claims about past performance.

It's the future that matters.

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About the Author

Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.

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