Emerging Market Equities Allocation

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Nomadix
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Emerging Market Equities Allocation

Post by Nomadix »

What is the ideal developing/emerging market equity allocation? Is it necessary? And why?
(trying to understand as oppose to just blindly allocating).
livesoft
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Re: Emerging Market Equities Allocation

Post by livesoft »

There is no ideal. It could be 0%, world-market weights, or even more. Why? I am not sure I would believe what anyone told me.

That written, I would suggest market weights. Also realize this asset class does go up and down, so patience is required.

Full disclosure: I bought more VWO today.
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G-Money
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Re: Emerging Market Equities Allocation

Post by G-Money »

Agree with livesoft. When in doubt, use market weight. Only deviate from market weight if you have a reason to do so.

If you don't have a Total International fund available, Emerging Markets are about 20% of Global ex-US equities.
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Occupier
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Re: Emerging Market Equities Allocation

Post by Occupier »

Emerging markets traditionally have a low correlation with the US and other developed markets. Also they are a bit riskier than developed. This presents an opportunity. If you hold a number of riskier non correlated assets. You reduce volatility - due to the low correlation - and increase the risk level at the same time. Since risk theoretically, and over longer periods of time usually is rewarded with higher returns, you increase returns without having increased overall risk. So you should have some EM and I think market weight is appropriate such as by just holding VEXUS or Vanguard Total International. To put this in laymen's terms. If you hold assets which do not go up and down together, they will even out because one will be going up when the other is on the way down. Further if the assets are of a nature that return more, you will have a higher return without as much movement as you would if you just held one asset class. Will this theory prove out into the future? Nothing is assured, but the theory has been recommended by many experts, it's called Modern Portfolio Theory.

FYI emerging markets consist of about 24% of ex US markets by market cap. Dave
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nisiprius
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Re: Emerging Market Equities Allocation

Post by nisiprius »

You really need to say more about your personal reasons for holding the equities of less-developed markets. (I am going to call them less-developed markets, because in my opinion "emerging markets" is marketing language plain and simple).

Before we go on, repeat three times: "less-developed markets, less-developed markets, less-developed markets." And then let's see whether anyone challenges this in a followup as not being a fair way to describe them.

There is a simple, robust, and to me convincing reason for holding them in international according to their market weight, as is done in Vanguard Total International. The reason is that assuming you want to hold "the market," less-developed markets are a part of the whole, and provided it is cheap and easy to include them, including them gets you a higher-fidelity proxy for "the market." In this view, if you only hold developed markets, it won't make a huge difference, but because you are holding less of the market you will be less diversified and experience a little more random fluctuation than if you were more diversified; the risk-adjusted reward should be just a bit better if you hold more of the market.

There are more complicated, more sophisticated, and to me much less convincing reasons for overweighting less-developed markets, consistently, as part of a long-term slice-and-dice multi-asset strategy. I personally suspect a lot of this is based on recency, emerging markets doing so well 2002-2007, but the people who advocate it insist it isn't. There is some genned-up stuff to the effect that you shouldn't be holding the market as it exists, you should be holding the market as it would exist if companies that ought to issue stocks but don't, did, and as if stocks that ought to be on the market but aren't, were.

And then there are the usual bogus (sorry, Livesoft) prediction-based reasons why emerging markets might or might not be a good buying opportunity right now. Those would have to do with mean reversion (it's down, so it will probably go up), momentum (it's down, so you'd be "catching a falling knife,") valuation (did the Chinese government let you audit their books?), etc. etc.
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Topic Author
Nomadix
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Re: Emerging Market Equities Allocation

Post by Nomadix »

Thanks for the input. Any advantage to market weighting an emerging market fund vs just buying a total international?
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G-Money
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Re: Emerging Market Equities Allocation

Post by G-Money »

Nomadix wrote:Thanks for the input. Any advantage to market weighting an emerging market fund vs just buying a total international?
I think there are advantages to buying Total International.

1. Fewer funds to manage.
2. More companies held in Total International than a composite of developed/emerging. For example, Vanguard's emerging market fund does not (last I checked) hold mid/small caps, while Total International does.
3. Few options for holding Canada without using Total International (Canada is a developed country, so it wouldn't be in emerging markets, but most "developed markets" funds only track EAFE, which doesn't include Canada).

I would only include a separate emerging market fund holding if: (1) I wanted to overweight emerging markets (I don't) or (2) my international holdings in other accounts did not include emerging markets (e.g., the TSP I fund tracks EAFE).
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Nomadix
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Re: Emerging Market Equities Allocation

Post by Nomadix »

Thanks.

What's the most reliable and easiest way to determine market weightings?

Just from reading through posts on this forum my impression is:

60% US
40% international (24% of which is emerging/less-developed markets)
livesoft
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Re: Emerging Market Equities Allocation

Post by livesoft »

Another reason to hold separate funds is that one has more opportunities for rebalancing. If one is unemotional and robotic about this, then one can overweight EM when it has tanked relatively more than Total Int'l and sell EM to pay off one's mortgage when it has gained relatively more than Total Int'l.

This year is a good example with Total Int'l at about -2.6% YTD, while Emerging Markets Index has done -15%. We don't know how these will perform going forward, but if you want to "buy low", I know which one I would prefer. But of course design and follow your asset allocation plan.

To see what the market weights are, just look at the weights inside some funds that are supposed to have market weights.
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Ketawa
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Re: Emerging Market Equities Allocation

Post by Ketawa »

Nomadix wrote:Thanks.

What's the most reliable and easiest way to determine market weightings?

Just from reading through posts on this forum my impression is:

60% US
40% international (24% of which is emerging/less-developed markets)
One easy way is to look at the holdings of VT, Vanguard Total World Stock ETF.

https://personal.vanguard.com/us/funds/ ... =INT#tab=2

The exact percentages of developed/emerging are subject to the specific definition of which countries are emerging markets. FTSE and MSCI classify some countries differently, so you'll have to do your own research on the funds you are using.
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