Acknowledgements
This book is dedicated to all the people that have helped me in this
endeavor. In particular, I would like to thank Rustam Botashev, Elena
Arskaya and Sergey Morozov for their valuable comments; Anatoly
Scherbinin for programming and Dasha Rozhanets for the graphic
design; Rajni Gupta, Elena Jacobi, Natalia Poliakova, Dmitry Repin and
Alexei Ustinov for kindly allowing me to use your inspiring photos; and
last but not least my son Eugene for editing.
“Simplicity is the key”, Ritchie Blackmore, musician
How this book came into being and what’s in it for you?
Like many others around the world I became interested in investment
as a way to achieve financial freedom so that my family could have
more time and means to do the things that we love to do. Twenty years
have passed since I opened a brokerage account and bought my first
shares and now I am happy to share one conclusion: a private investor
can actually make money in capital markets without being a rocket
scientist. However you need to learn quite a few things and most
importantly, you need to have confidence in yourself. This is
particularly the case in the early stages, when you are bound to make
painful mistakes that are, I’m afraid, just part of the learning process.
This guide builds on fundamental investment principles, which have
been well known for years and are talked about by millions (but
surprisingly are still not adequately followed in real life). My
contributions to the subject amounts to three new twists, all reflecting
fundamental global changes in the location and methods of wealth
creation.
First, assets from Emerging Markets are a must-have for a portfolio of
any serious private investor because long term they provide growth
above average Advanced Markets growth.
Second, technology advancements provide additional acceleration for
Emerging Markets.
Third, investing globally these days is much easier than most people
think.
Today, investing internationally is rarely restricted to where one lives
and can be easily achieved as long as you have regular savings,
determination and knowledge. In many countries investing in major
Emerging Markets can be as easy as going to your local post office. This
visit is needed primarily to send the signed forms and copy of
identification document needed to open a brokerage account.
What’s in it for you?
I understand finance and investment well enough even though I do not
work in the finance industry. This is the reason why this book will be
useful to readers - I do not work in the finance industry, and as such,
will not try to sell you any financial products or attempt to get
commissions from your investments. One has to always keep in mind
that the advice that we get from financial institutions is often geared
towards making us buy or sell something so that the institution can
earn commissions, sometimes without our long-term interest at heart.
Make no mistake, the finance industry lives off commissions, sell/buy
or lend/borrow spreads. We live in a global market economy in which
this is an established practice. This book is geared towards sharing
some important basic rules of investment, allowing the reader to have
a better understanding of what he or she is being sold and if one is
paying a reasonable price. I would like to mention that this book is built
on the assumption that you already believe in the benefits of long-term
investment in shares (equity) and bonds (debt).
Figure 0.1 below shows the total real (after inflation) returns from
different US assets [1].
Figure 0.1 – Total Real Returns, US assets, logarithmic scale, 1926-2011.
Source: Shawn Allen, http://www.investorsfriend.com
Figure 0.1 reinforces the argument about the benefits of long-term
investments. Bear in mind, that this is not a get-rich-quick scheme and
that you will need to have long-term commitment. This strategy may
look boring compared to short-term speculation but as we will
demonstrate later, it produces considerably better and much more
consistent results.
I will start by assuming that you fundamentally believe in index
investing, portfolio diversification and cost averaging. The importance
of which will be revisited in more detail in Chapter 1. We will continue
to explain the three main reasons why investments in Emerging
Markets are likely to outperform investments in Advanced Markets in
the years to come by looking at their demographics, health of public
finance and the acceleration of economic growth through technological
innovation, which will be followed by an explanation of the practical
steps individual investors should take into account if they want to
participate in this growth.
The main BENEFIT of this book for the reader is that it explains how to
build a BETTER investment portfolio through the addition of assets
from Emerging Markets. We will argue that if you fundamentally
believe in the market economy and its inevitable globalization you, by
default, MUST invest in Emerging Markets. We will show you how to do
this with little hassle, controlled risks and reasonable expenses. I would
like to note that over the years I have used this approach myself and it
does enhance the performance of a portfolio that consists of major
global investment index funds from Advanced Markets. We will explain
the theory behind this approach and will demonstrate some modern
tools that could be used for optimizing your asset allocation strategy.
Finally I would like to finish by saying that I expect this guide to be
equally useful for investors from the US, Europe, the BRICs and
hopefully many other countries across the globe.
How This Book is Different from Other Investments Book?
1st. It is simple and practical. Most of the books about investing which I
have read were quite dense and overrun with graphs and formulas. I
wanted to write a simple yet clear guide with crisp practical
suggestions.
2nd. The guide will describe modern investment assets and tools
available for private investors; tools that In the past were available only
to institutional investors and were prohibitively expensive to
individuals.
3rd.The guide will provide links and access to some of these tools, such
as the risk/reward calculator, which is embedded in this application and
works offline.
There is one topic that this guide doesn’t explain: taxes. It is virtually
impossible to provide an accurate guide to taxes for a global audience
because tax regulations differ vastly between countries.
Brazil. Photo courtesy of Alexei Ustinov
I will take this opportunity to explain my level of expertise in the
investment area and give you a bit of background on myself. I was born
and grew up in Belarus when this small country, sandwiched between
Russia, Ukraine, Poland and the Baltic states was still part of the Soviet
Union. I got my Bachelor’s degree in Computer Science in one of the
leading universities and then had the opportunity to work on my PhD in
the late 80s in one of the most advanced Artificial Intelligence labs in
the world at that time – the one at Oxford University in the UK.
After returning back to Belarus, which by that time had become part of
the Commonwealth of Independent States (CIS), I realized that in order
to provide for my family I had to leave science and do something more
practical. I worked for several years for a PC assembly startup and then
joined a major global IT company in 1992. Over these 20 years I worked
a lot in the Middle East, Eastern Europe, US, traveled extensively
through the Asia Pacific region and spent 6 years in the UK. I currently
lead the business of this company in Russia and CIS countries from
Moscow, Russia. Also I am a visiting Lecturer-Practitioner of Strategy,
Leadership, Innovations and Personal Finance Management at the
Moscow School of Management Skolkovo.
I got seriously interested in investing in the early 90s, and then
gradually built a lot of practical experience in this field. This practical
investment experience in very diverse cultural and economic
environments taught me a very important lesson that can be described
with a simple phrase – Diversification is King. As someone who has
done four full-time international relocations and several temporary
ones within a 20 year time frame I have a good understanding of
diversity, both in culture as well as economy and technology. Due to
the nature of my job, I also have a solid grasp of IT technology and
finance. The importance of technology is integral to this book because
as we will explain later, economic benefits from technological
developments are starting to translate faster into economic growth in
Emerging Markets (EM) when compared with Advanced Markets (AM).
I strongly believe that this is the area that will have the most impact on
the development of EM economies in the years to come.
A short introduction to my financial expertise is also important in the
context of this book, as I will explain the basic theory behind the key
practical suggestions. At the beginning of 2012 the publishing house
Alpina Publishers (Moscow, Russia) released my book “Protect and
Grow” (in Russian), which dealt with the main principles of private
investment. Simultaneously I released an application on the Apple
AppStore with the same name (also in Russian). In parallel and as a
hobby I launched an online service for private investors
www.essentialportfolio.com with several useful tools: two risk/reward
calculators and a multi market, multi currency portfolio manager with a
real time risk/reward calculation and rebalancing function, a service
that is available in both English and Russian. Several months after
releasing the book and launching the web service I gathered enough
feedback both from Russia and throughout the world that heavily
supported the notion that the subject of investing in Emerging Markets
is of huge interest to many private investors. Hence I decided to
document my theoretical and practical knowledge of this subject and
share it with a global audience.
I am passionate about global investment opportunities available for
modern private investors. My other passion is sailing. For me sailing
epitomizes freedom, opportunity and excitement. This is why we have
chosen an image of a sail for the logo of our Internet service
www.essentialportfolio.com. I hope very much that reading this book
and hopefully using our on-line service will help readers across the
world realize their passions and dreams.
Sailing gives you freedom, opportunity and excitement. Photo courtesy
of Elena Jacobi
Structure of the Guide
Chapter 1.
Fundamental Investment Principles: Overview of the main investment
principles: risk and return, index investing, portfolio diversification,
rebalancing, cost averaging and currency diversification.
Chapter 2.
Why invest in Emerging Markets: The impact of assets from Emerging
Markets on reward and risk parameters of investment portfolios.
Demographics and health of public finance as key growth factors for
Emerging Markets.
Chapter 3.
Technology: The faster path for Emerging Markets. Why the economies
of Emerging Markets are likely to benefit more from technological
advancements than those of Advanced Markets
Chapter 4.
Practical steps to investing in Emerging Markets: How to find key assets
and the three main routes to invest.
Conclusions
Bonus chapter: Embedded risk/reward calculator