What's your EM tilt and why?

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docbrown
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What's your EM tilt and why?

Post by docbrown » Thu May 12, 2016 4:35 pm

For those of you who have an emerging markets tilt, how much is it and what is your justification for that amount?

I currently have a simple, world portfolio that I'm philosophically happy with. It's a combination of VT and Vanguard's 60% Total US + 40% Total International suggestion (which technically has a US tilt). I've read about value, size, beta, and other factors for years, and done lots of backtests (not that that means anything) but never pulled the trigger for philosophical reasons. However, I'm at the point where I would consider an emerging markets tilt. It seems like a good deal now (I realize that's market timing). I'm willing to hold it forever because I don't care about volatility.

On the extreme side, if you really believe in its potential for outperformance, you would want 100%. I'm trying to figure out, what percentage do I believe in this scenario? It's less than 100 and more than 0. :wink:
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schoolboyguy
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Re: What's your EM tilt and why?

Post by schoolboyguy » Thu May 12, 2016 4:49 pm

I have approximately a 75/25 stock/bond portfolio. International allocation of stocks is about 50%. EM allocation is about 50% of international stocks. I don't have a reason for this exact number other than high expectations. I've actually been questioning lately whether this is too much, but i think I'll stick with it for now.

Also, i feel that Europe is going to really drag down the returns of VXUS, so I guess i have such a high EM allocation partly to diversify out of Europe.

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Re: What's your EM tilt and why?

Post by oldcomputerguy » Thu May 12, 2016 5:03 pm

docbrown wrote:For those of you who have an emerging markets tilt, how much is it and what is your justification for that amount?


My international allocation is about 25% EAFE index (no EM) and 75% ACWI exUS index (which index is about 18% EM). Just a bit of tilt away from EM, maybe the tilt is unnecessary but the reduced risk lets me sleep a bit better. My horizon to retirement is less than 5 years, if I had a longer horizon I would probably go all ACWI.
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Re: What's your EM tilt and why?

Post by livesoft » Thu May 12, 2016 5:51 pm

I only tilt to small in EM, but overall EM is market weight. Small is half of my EM in the form of DGS, EWX, and whatever VSS has. Non-small EM is found in VEU.

Why? Simple: Hope springs eternal.
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ruralavalon
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Re: What's your EM tilt and why?

Post by ruralavalon » Thu May 12, 2016 6:01 pm

We have no tilt, we just use Vanguard Total International Stock Market Index Fund Admiral (VTIAX). I have not seen any reason to think that emerging markets will outperform developed markets.
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galeno
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Re: What's your EM tilt and why?

Post by galeno » Thu May 12, 2016 6:05 pm

We hold a FTSE all world equity index ETF as our only stock holding. The EM % = 9.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 3.0%. TER = 0.4%. Port Yield = 2.0%. Term = 35 yr. FI Duration = 6.2 yr. Portfolio survival probability = 100%.

jalbert
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Re: What's your EM tilt and why?

Post by jalbert » Thu May 12, 2016 6:13 pm

If EM is so undervalued today, why haven't market participants bid up the price? Is there something you know that market participants don't? Or maybe something they know that you don't?

Today may turn out to be a fabulous day to buy EM stocks. But maybe the market is pricing in more risk, i.e. a somewhat lower probability that those fabulous returns will materialize, than when valuations were higher.

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stratton
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Re: What's your EM tilt and why?

Post by stratton » Thu May 12, 2016 6:29 pm

I use a MSCI ex US international fund and Vanguard's FTSE ex-US Intl small cap with a dash of frontier (FM) thrown in. Counting the frontier I'm probably about 25% in EM.

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Re: What's your EM tilt and why?

Post by docbrown » Thu May 12, 2016 6:43 pm

jalbert wrote:If EM is so undervalued today, why haven't market participants bid up the price? Is there something you know that market participants don't?

Today may turn out to be a fabulous day to buy EM stocks. But maybe the market is pricing in more risk, i.e. a somewhat lower probability that those fabulous returns will materialize, than when valuations were higher.


That is absolutely correct, as others have pointed out as well. Logic dictates never deviating from the market portfolio.

But the idea of buying what's out of favor is forever alluring. How you determine what is disfavored (if that is even possible) is entirely subjective. I wouldn't do it by looking at P/E ratios or by trying to gauge that market's emotions. Disfavored means, to me, that its current price doesn't reflect future returns. I realize that not only can you not know the future, but if the market is efficient, all the participants have already voted on their opinion of future returns for EM and we get the price we've got.

I don't believe in forecasting so much, but I believe in reversion to the mean. I think that EM are priced below their long term mean, and that things will tend to revert to the mean. Of course, the market might be really prescient and we indeed are just about to enter a new regime of lower valuations. Also, if mean reversion is such a sure thing, then logically you would want to bet on individual sectors, which I have no interest in.

I have a world market portfolio because it's the only thing I can support rationally as the most optimal portfolio. But I would be willing to risk a small percentage of underperformance if the probability of and amount of gain was high enough. I'm definitely not smart enough to quantify that probability. I suppose if I could go either way, there's no reason to do it. In the absence of a screaming reason to tilt, I won't do it. Still, I think about the possibility a lot. It's not greed or anything; I just want to figure the puzzle out and be right. Probably, I should step away from the analysis and do nothing!
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Re: What's your EM tilt and why?

Post by galeno » Thu May 12, 2016 6:53 pm

If EM stocks outperform they will comprise a higher percentage of the FTSE all world equity index that we already hold.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 3.0%. TER = 0.4%. Port Yield = 2.0%. Term = 35 yr. FI Duration = 6.2 yr. Portfolio survival probability = 100%.

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Re: What's your EM tilt and why?

Post by GoldenFinch » Thu May 12, 2016 6:53 pm

I bought extra EM in 2002 because I thought it was a good idea. It worked out well for awhile (doubled), but that didn't last. I never sold it and I won't, so in the long run maybe it will turn out okay. Now I only buy total international.

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Re: What's your EM tilt and why?

Post by jalbert » Thu May 12, 2016 7:10 pm

As a less common position, I don't think it is necessary for someone in the US to own any EM equities, particularly with the incorporation of Canadian and Korean equities in the VG DM equity index fund.

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Re: What's your EM tilt and why?

Post by APB » Thu May 12, 2016 7:27 pm

Haha, I'll guess that I'm the most aggressive EM tilt here. Not very BH of me, but ¯\_(ツ)_/¯. I am very aggressive because I'm:
- In my 20s and have 40 years of accumulation ahead of me
- High income and save aggressively
- Very unemotional investor

My present portfolio is:
- 40% VTSAX (US)
- 40% VEMAX (EM)
- 20% VTMGX (Developed ex-US)

The goal of my portfolio is to seek the maximum expected return, within reason, without employing leverage. To determine a reasonable balance for these goals, I looked at the Wealthfront Investment Methodology White Paper. https://research.wealthfront.com/whitep ... thodology/

I initially set my AA loosely-based on a mix of their taxable / non-taxable recommendations. Outside of the 3 above, which were the lion share of their recommended AA, I will be adding VGSLX/VNQ to my 401K, now that I can buy Vanguard's Admiral REIT without swaying my AA dramatically. My target AA will be:

- 40% VTSAX (US)
- 30% VEMAX (EM)
- 20% VTMGX (Developed ex-US)
- 10% VGSLX (REIT)

I tilt to EM because I believe they have a higher expected return due to a favorable CAPE.

https://blog.wealthfront.com/wp-content ... gure-9.jpg

The United States on the other hand, has a less favorable CAPE.

https://blog.wealthfront.com/wp-content ... gure-7.png

Should the CAPE between EM and the United States converge, I will likely return to a market weight portfolio. Until then, I'll stay the course. It would be nice to look back in 30-40 years and see outperformance relative to a Total US, or 3-fund portfolio. If not, I save enough that I will not lose any sleep at all over my decisions. :beer

YMMV, this is what I do and why I do it. I'm not advising anyone follows in my foot steps, and when instructing others, I encourage a 3-fund portfolio.
My posts represent my own opinion and do not constitute financial advice. I am simply a hobbyist. :)

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jhfenton
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Re: What's your EM tilt and why?

Post by jhfenton » Thu May 12, 2016 7:56 pm

For us, EM is about 18.5% of equities, or 37% of international. Most is held directly in VEMAX/VWO, but we have additional EM exposure from VSS (Vanguard ex-US Small Cap), VGRLX (Vanguard Global ex-US Real Estate), and DODFX (Dodge & Cox International). I only hold the DODFX because it's the most logical choice in my employer-sponsored HSA.

I didn't specifically pick 18.5%. As a percentage of equities, our international targets are 15% developed, 15% small, 15% emerging, and 5% international real estate. By the time you include the extra EM in small and real estate, we're over 18%. And I'm fine with that.

My strategy is to divide our portofolio into 8 equity slices--6 x 15% broad market slices and 2 x 5% real estate sector slices--and rebalance between them. The numbers are completely arbitrary. You could do a mix of 20's and 10's and 17's and 12's.

As for why...EM is less than 100% correlated with developed and U.S. equities, so even if expected returns are the same as other equities, there's value in owning both and rebalancing among them. Second, EM is probably riskier than developed and U.S. markets, so it may have higher expected returns. Ditto for it being less liquid than developed and U.S. markets. Third, my perception and belief is that EM is particularly subject to mispricing via boom/greed and bust/panic cycles that can lead to anomalous returns for a disciplined, rebalancing investor.

I may be wrong on most of those counts, but like the rest of my portfolio, I'm willing to ride it out for 20 years to see.

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Re: What's your EM tilt and why?

Post by grabiner » Thu May 12, 2016 8:05 pm

I would have half my international stock in emerging markets if costs were equal, because I expect emerging markets to be a better diversifier.

However, costs aren't equal. Developed Markets Index is less expensive than Emerging Markets Index or FTSE All-World Ex-US Small-Cap, and also has a lower tax cost than Emerging Markets Index because emerging markets have more non-qualified dividends. There is no low-cost EM small-cap fund, so I get my EM small-cap from the EM in FTSE All-World Ex-US Small-Cap and the small-cap in Emerging Markets Index, and don't hold a separate high-cost fund for EM small-cap. Therefore, my target international allocation is 3/8 developed large, 1/4 developed small, 1/4 emerging large, 1/8 emerging small.
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saltycaper
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Re: What's your EM tilt and why?

Post by saltycaper » Thu May 12, 2016 9:40 pm

Of the approx. 40% of equities that are ex-U.S., they are about equally divided in total int'l, int'l small, and emerging markets funds. With the current composition of the former two funds, that means about 45% of int'l holdings are emerging markets.

In addition to potential benefits mentioned already, I'm specifically taking the extra political, regulatory, and accounting-related risks in the hope that over the next 30 years the gap in the risk-premiums demanded between emerging and developed countries will shrink. I'm aware this may not happen, and that the reverse is also possible.

I also seek to invest in areas where cost of capital is higher, as everywhere one looks the cost of capital appears to be quite low these days.

Finally, I find the market-weighted efficiency argument to be a red herring, as the efficiency of my portfolio and the efficiency of the market are not necessarily the same thing, so I am not bothered by straying from total world.
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whodidntante
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Re: What's your EM tilt and why?

Post by whodidntante » Thu May 12, 2016 9:58 pm

I've got the optimal amount. Lol

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Re: What's your EM tilt and why?

Post by Peter Foley » Thu May 12, 2016 10:52 pm

Zero. I don't trust the accounting or the currency.

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Re: What's your EM tilt and why?

Post by jalbert » Thu May 12, 2016 11:53 pm

I would have half my international stock in emerging markets if costs were equal, because I expect emerging markets to be a better diversifier.


This may not be true moving forward. EM now has a much larger technology sector than int'l DM, and thus may have a higher correlation with the large US technology sector.

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Re: What's your EM tilt and why?

Post by Ari » Fri May 13, 2016 12:06 am

I've got 50% Global (which is, what, 15% EM?) and 20% specifically EM. I hold it because I'm already at 100% equities and want to take on more risk. EM stocks are riskier, so the expected returns are higher, according to efficient market theory.

They are also a good diversifier, as the developed countries tends to have pretty high correlation to each other, whereas EM is somewhat less correlated to them. All in all, I expect higher volatility and higher returns, knowing full well I might be disappointed in the latter aspect.
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Re: What's your EM tilt and why?

Post by kramer » Fri May 13, 2016 12:23 am

About 27% of my foreign stock allocation is to emerging markets.

Foreign stocks make up about 60% of my holdings, so emerging markets represent about 16% of equity holdings (VWO, portion of VSS and VNQI)

Why? :
* I live and spend in an Emerging Market country so the EM currency/markets correlate better with my spending
* Diversification (the majority of my US and developed market holdings are small stocks VSS & VBR)
* Foreign stocks still seem better value than US equities

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Re: What's your EM tilt and why?

Post by JonnyDVM » Fri May 13, 2016 6:17 am

40% of equity allocation is international. 50% total int (FSGDX)/ 25% Int small cap (VSS)/ 25% emerging (FPMAX). Glad to see some others tilt even harder. I thought I was the only one that loves throwing money down what seems to be a black hole. :annoyed
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Re: What's your EM tilt and why?

Post by Rotsevni » Fri May 13, 2016 6:42 am

I got 20% allocated in iShares Core EM ETF, i'm thinking about increasing my EM exposure to 25% because EM represents 24,6% of the world equity market cap in 2015 and because of my long time horizon(30 +- yr) I can handle some more volatility.

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Re: What's your EM tilt and why?

Post by midareff » Fri May 13, 2016 7:23 am

Total Intermational is 18.3% EM. That's enough for me. Getting less complicated is part of gettin' more stupid.

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Taylor Larimore
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Beating the Market?

Post by Taylor Larimore » Fri May 13, 2016 8:15 am

What's your EM tilt and why?

docbrown:

I do not "tilt." I have learned that the stock market knows more than I do.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: What's your EM tilt and why?

Post by FillorKill » Fri May 13, 2016 8:28 am

docbrown wrote:For those of you who have an emerging markets tilt, how much is it and what is your justification for that amount?

About 23% of portfolio ATM or thereabout. Why? Beyond any sound investing rationale it's the mystery meat intrigue I find irresistible. Like buying a crab salad sandwich out of a vending machine in a parking garage; you don't really know what you have but you know it's risky, so you cross your fingers and hope for the best. :shock:

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Re: What's your EM tilt and why?

Post by Dulocracy » Fri May 13, 2016 8:40 am

I have a small tilt to EM, but I also have a small and value tilt in EM. EM represents 25% of my international holdings. This is in a large part because international is 40% of my stock portion, which would mean that 10% of the total stock portion would go in EM, which is easy to keep up with in making calculations.

My tilt is broken down as such:
4% stock portfolio in Vanguard EM
3% stock portfolio in DFA small EM
3% stock portfolio in DFA value EM

If I did not have access to the small and value tilts here, I would likely go 30% of international in EM.

This portfolio was designed prior to the recent EM trouble. I found it easy to stay the course, as it was not so much of a tilt as to create panic, and I know I am buying low and anticipating rates to go up.

I like risk. My US stocks are 1/3 Large, 1/3 Mid, 1/3 Small Value, meaning 20% of my stock allocation is small value and 20% is mid-cap. That is a lot of risk. Please take it to heart, then, when I say that I would never go over 30% of my international in EM, because the risk there is so much less predictable. I would also cap it at 15% of the total stock portfolio (presuming a 50/50 divide or higher allocation to international). From someone who loves risk, I think that EM provides a good potential boost, but the downside potential is too great to let more than that be at risk.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

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Re: What's your EM tilt and why?

Post by TheTimeLord » Fri May 13, 2016 8:48 am

25% of my wife's current 401K contributions. Why, because EM has been down a good while and 25% of her contributions really doesn't matter one way or the other to our final outcome so I am basically adding the lightest touch of pastel to my very grey portfolio.

Basically, a half slice of lemon in my pitcher of water.
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hafjell
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Re: What's your EM tilt and why?

Post by hafjell » Fri May 13, 2016 8:50 am

Dulocracy wrote:My tilt is broken down as such:
4% stock portfolio in Vanguard EM
3% stock portfolio in DFA small EM
3% stock portfolio in DFA value EM

What do make of Dave Swensen and others who say less than 5% of total portfolio is too small to make a difference? Not trying to start a fight. I'm interested in holding EM at similarly low levels, and haven't yet because of their advice.

Looks like EM is 25% of 40% of total stock = 10% of total stock?

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Re: What's your EM tilt and why?

Post by in_reality » Fri May 13, 2016 8:57 am

hafjell wrote:
Dulocracy wrote:My tilt is broken down as such:
4% stock portfolio in Vanguard EM
3% stock portfolio in DFA small EM
3% stock portfolio in DFA value EM

What do make of Dave Swensen and others who say less than 5% of total portfolio is too small to make a difference? Not trying to start a fight. I'm interested in holding EM at similarly low levels, and haven't yet because of their advice.

Looks like EM is 25% of 40% of total stock = 10% of total stock?


4% + 3% + 3% = 10%

10%>5%

Otherwise why hold small caps at all. International Total Market is about SCV=2%, SCB=2%, SCG=2%. So who need SCV. And who need SCB ...

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Re: What's your EM tilt and why?

Post by dbr » Fri May 13, 2016 9:00 am

Is it ok to post that I do not have a tilt because I don't need to and I don't want to?

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Re: What's your EM tilt and why?

Post by Dulocracy » Fri May 13, 2016 9:14 am

in_reality wrote:
hafjell wrote:
Dulocracy wrote:My tilt is broken down as such:
4% stock portfolio in Vanguard EM
3% stock portfolio in DFA small EM
3% stock portfolio in DFA value EM

What do make of Dave Swensen and others who say less than 5% of total portfolio is too small to make a difference? Not trying to start a fight. I'm interested in holding EM at similarly low levels, and haven't yet because of their advice.

Looks like EM is 25% of 40% of total stock = 10% of total stock?


4% + 3% + 3% = 10%

10%>5%

Otherwise why hold small caps at all. International Total Market is about SCV=2%, SCB=2%, SCG=2%. So who need SCV. And who need SCB ...


Several answers.

1) To me, nothing is too small to make a difference. I wanted 10% of total stock (25% of international) in EM. I have the option of tilting value and small. I broke it up as 40/30/30. EM is still 10% of the portfolio.
2) When I started the 401k, the EM small and EM value options were the only ones available. I was responsible for getting the Vanguard EM added. I started rebalancing to 40/30/30 with new money. I did not want to sell positions when they were down.
3) Because of the greater risk that the small and value portions add, I did not want to bring it up to something like 5% per category. To me, avoiding a small percentage while ignoring the overall needs of the portfolio is simply saying, "That is to small to worry about." I am willing to do the small amount of extra work. If it is irrelevant in the long run, I had a little fun doing something useless. If it IS relevant in the long run, it was not useless and I still had fun. It is my hope someday to have a portfolio large enough that 3% does matter significantly. Would adding 3% of Warren Buffet's net worth to your portfolio make a difference? :D
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

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Re: What's your EM tilt and why?

Post by namenloseblonde » Fri May 13, 2016 11:07 am

My target is 10% of total or 25% of international allocation in EM. Right now it's a little higher than that because I TLHed from Vanguard Developed Markets to Total International and haven't gotten around to TLHing back. Why? Well, in addition to the diversification reasons other posters have mentioned, my husband has a VERY attractive EM fund in his 401K, with a lower ER than any other international fund we hold (including Admiral Shares of VTIAX, etc.). We have a reasonably long time until retirement (25 years) and a pretty high risk tolerance, so why not?

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Re: What's your EM tilt and why?

Post by hafjell » Fri May 13, 2016 11:25 am

in_reality wrote:4% + 3% + 3% = 10%

10%>5%

I think Swensen's cutoff was 5% of total portfolio per subclass. Isn't this 10% of just his stock allocation? Can't tell what the real number is without knowing the stock/bond numbers.

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Re: What's your EM tilt and why?

Post by hafjell » Fri May 13, 2016 11:29 am

Dulocracy wrote:I wanted 10% of total stock (25% of international) in EM. I have the option of tilting value and small. I broke it up as 40/30/30. EM is still 10% of the portfolio.
I am willing to do the small amount of extra work. If it is irrelevant in the long run, I had a little fun doing something useless. If it IS relevant in the long run, it was not useless and I still had fun. It is my hope someday to have a portfolio large enough that 3% does matter significantly. Would adding 3% of Warren Buffet's net worth to your portfolio make a difference? :D

Thanks for the clarification. Sorry if I read it wrong.
Also, I agree on the fun side of all of this. When I learned I could save money by choosing individual classes of index funds instead of a target date, I was over joyed, because I was saving fees, and I got to do it myself. More fun, agreed. Thanks for the explanation.

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Re: What's your EM tilt and why?

Post by JimmyD » Fri May 13, 2016 1:26 pm

I'm good with the 18.30% in Total International. Big fan of simplicity.

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Re: What's your EM tilt and why?

Post by heyyou » Fri May 13, 2016 1:48 pm

I have 10% of my equity value in EM funds because that suits me, just my preference.

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Re: What's your EM tilt and why?

Post by Artsdoctor » Fri May 13, 2016 2:16 pm

Doc,

I don't tilt. I used to have a complex portfolio and it was fine. But I'm approaching retirement and for me, simple is better.

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Re: What's your EM tilt and why?

Post by Elsebet » Fri May 13, 2016 2:42 pm

I have 24% international made up of:

35% - FSIVX - SPARTAN INTL INDEX FID ADV CLASS
65% - FPMAX - SPARTAN EMERGING MKT INDEX FID ADV CL

Not sure why I decided to have way more emerging, I will probably shift some of that to FSIVX in future rebalancing.

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Re: What's your EM tilt and why?

Post by JoMoney » Fri May 13, 2016 4:00 pm

Relative to the "global market", I have a negative tilt... 0% EM
I don't have an international allocation, but if I did, I would probably still avoid EM if I could easily and cheaply do so (i.e. use Vanguard Developed Markets rather than Total International).
Rather than stir up a bunch of fear mongering stories, I'll just say my tilt is a "risk preference" that helps me sleep better at night. Generally speaking, I don't buy the idea that adding it to the portfolio reduces risk. For those who jump into it looking for higher returns, I wish them well, but I'll pass.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: What's your EM tilt and why?

Post by jginseattle » Fri May 13, 2016 4:57 pm

I have 10% of equities in EM. In order to reach this target I had to add a dedicated EM fund. I did this about two years ago. And I wouldn't be opposed to increasing EM exposure, but not too much more.

Reason: EM is cheaper on a relative basis, and expected returns seem more favorable.

alex_686
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Re: What's your EM tilt and why?

Post by alex_686 » Fri May 13, 2016 5:19 pm

docbrown wrote:
jalbert wrote:If EM is so undervalued today, why haven't market participants bid up the price? Is there something you know that market participants don't?

Today may turn out to be a fabulous day to buy EM stocks. But maybe the market is pricing in more risk, i.e. a somewhat lower probability that those fabulous returns will materialize, than when valuations were higher.


That is absolutely correct, as others have pointed out as well. Logic dictates never deviating from the market portfolio.


Which for me is what I am struggling with. The indexes that index EM funds use are “investable indexes”, not “market indexes”.

Only stocks and markets that are liquid are included because of the need to closely replicate the index with low trading costs, specifically implicated trading costs like a wide bid/ask spread. So large multinational companies, which act like their developed market peers, tend to be over represented.

Excluded are illiquid firms, which tend to be small cap and value. Countries with currency controls or other restrictions on “hot money” investments tend to be underweighted. I think these companies are what you want if you invest in EM. A nice risk / return profile which has a low correlation to US large cap stocks.

EM is one of the few markets where I think active management can bring real benefit. That being said, I am having a really hard time finding an active manager that I like. So right now I am just holding the market weight.

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Taylor Larimore
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Emerging Markets underperform their benchmark

Post by Taylor Larimore » Fri May 13, 2016 6:38 pm

EM is one of the few markets where I think active management can bring real benefit.

Alex_686:

Perhaps you are unaware that the 2015 S&P DowJones SPIVA Scorecard found that 91.43% of International Emerging Market mutual funds underperformed their benchmark index during the past 10-years.

Best wishes.
Taylor .
"Simplicity is the master key to financial success." -- Jack Bogle

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Robert T
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Re: What's your EM tilt and why?

Post by Robert T » Fri May 13, 2016 8:12 pm

.
13% of equities for last 13.4 years (2003-2016).

No guarantees EM will outperform as per the last 22 years

May 31, 1994 to April 29, 2016: Annualized return (%)


SInce 2003 EM returns have been similar to US Small Value (S&P 600 Value), higher than S&P500 by about 1.5% per year.

In 2003 my 13% allocation was 3 times the weight in the MSCI ACWI - I was just comfortable with the allocation (personal choice and circumstance). Now EM weight in MSCI ACWI is about 10%. I have no plans to change my EM allocation any time soon. I am not sure what the long-term equilibrium EM weight in overall market will be (with eventual graduation of some EM countries to developed). I like current EM valuations (cheap) - but again, no guarantees.

EM returns are negatively skewed - from http://www.mscibarra.com/products/indic ... ersary.pdf "The MSCI Emerging Markets Index shows greater (nearly twice) negative skew than the MSCI World Index in this period, reflecting greater downside risk. This is evident with extreme negative returns during the emerging markets crisis in 1998.” (see pg. 36). Keeping fixed income in Treasuries can potentially reduce the negative skewness impact of EM on an overall portfolio.

The best EM allocation is the one you can stick with.

Robert
.

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