A few questions about International... VXUS, VEA, VWO... low returns

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Christian NY
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A few questions about International... VXUS, VEA, VWO... low returns

Post by Christian NY » Sat Apr 22, 2017 9:17 am

Hi everyone,
Thanks to this forum I have learned a lot over the past few weeks, eliminated a number of funds from my portfolio (PDBZX, MWTRX, VNQ) and my U.S. stock and bond portions are nice and simple.

I am still debating on what to do with International. I don't like International (0.56% annual return for Developed Markets???) but all experienced investors say it must be a part of the portfolio to the tune of at least 15%. To that end, I have come up with 3 questions about International and I would greatly appreciate your comments :happy

VXUS Vanguard Total International Stock ETF
VEA Vanguard FTSE Developed Markets ETF
VWO Vanguard FTSE Emerging Markets ETF
also referenced:
FMIJX FMI International Fund
BEXFX Baron Emerging Markets Fund

1) Is VXUS comprised of VEA and VWO? I remember reading this on the forum but I can't verify that information with a Google search. What is the right place to look if I want to know using what finds VXUS can be replicated with and what is the allocation of those funds inside VXUS?

2) Historical data for the combination of FMIJX and BEXFX only goes back 5 years as BEXFX did not exist before. How would I go about estimating hitorical returns of a portfolio including years those funds didn't exist. I realize the answer may be "they didn't exist, it's impossible" but if you wanted to compare the performance of VXUS vs. FMIJX/BEXFX how would you approach this task?
I know that the general advice on this forum to always go with low-cost ETFs and not even debate the issue but what if I wanted to compare portfolio results with 10% VEA/5% VWO to 10% FMIJX/5% BEXFX? How would I go about doing that?

3) What is the best allocation of VEA and VWO? Emerging performs better over time but Developed is less risky, most portfolios I have seen have more Developed and less Emerging. What split between Developed and Emerging is best? What about VEU? What resource can I use to find out the allocation within VEU?

Thank you and sorry about the silly beginner questions.
Last edited by Christian NY on Mon Apr 24, 2017 10:41 am, edited 3 times in total.

dbr
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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by dbr » Sat Apr 22, 2017 9:23 am

Christian NY wrote: I don't like International (0.56% annual return for Developed Markets???)
That is not an estimate of the expected return from international developed markets. Where did you get that number?

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CyclingDuo
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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by CyclingDuo » Sat Apr 22, 2017 9:29 am

Christian NY wrote:Hi everyone,
Thanks to this forum I have learned a lot over the past few weeks, eliminated a number of funds from my portfolio (PDBZX, MWTRX, VNQ) and my U.S. stock and bond portions are nice and simple.

I am still debating on what to do with International. I don't like International (0.56% annual return for Developed Markets???) but all experienced investors say it must be a part of the portfolio to the tune of at least 15%. To that end, I have come up with 3 questions about International and I would greatly appreciate your comments :happy

There is no written rule that you have to hold international index funds. Especially in today's global trading world, you have to consider how many US Stocks derive a healthy portion of their sales in other countries.

1) Is VXUS comprised of VEA and VWO? I remember reading this on the forum but I can't verify that information with a Google search. What is the right place to look if I want to know using what finds VXUS can be replicated with and what is the allocation of those funds inside VXUS?

2) Historical data for the combination of FMIJX and BEXFX only goes back 5 years as BEXFX did not exist before. How would I go about estimating hitorical returns of a portfolio including years those funds didn't exist. I realize the answer may be "they didn't exist, it's impossible" but if you wanted to compare the performance of VXUS vs. FMIJX/BEXFX how would you approach this task?
I know that the general advice on this forum to always go with low-cost ETFs and not even debate the issue but what if I wanted to compare portfolio results with 10% VEA/5% VWO to 10% FMIJX/5% BEXFX? How would I go about doing that?

That's not true about ETF's. It is not general advice on this forum over mutual funds themselves.


3) What is the best allocation of VEA and VWO? Emerging performs better over time but Developed is less risky, most portfolios I have seen have more Developed and less Emerging. What split between Developed and Emerging is best? What about VEU? What resource can I use to find out the allocation within VEU?

That's hard to determine as everyone has their own unique portfolio strategy from one fund, to many funds, to a mix of domestic, international, emerging, etc... . What works for one, may not for another.

Thank you and sorry about the silly beginner questions.
Study the options of a three fund portfolio, and see all the options of low cost international index funds and ETF's here:

https://www.bogleheads.org/wiki/Three-fund_portfolio
Last edited by CyclingDuo on Sat Apr 22, 2017 9:33 am, edited 1 time in total.

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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by AlohaJoe » Sat Apr 22, 2017 9:32 am

1. No, VXUS is not composed of VEA and VWO in any meaningful sense. However, you can replicate VXUS by mixing together VEA and VWO in your own portfolio. You can look at Vanguard's page on VXUS to figure out how much VWO you should have https://personal.vanguard.com/us/funds/ ... IntExt=INT. Right now it says 19.30%. That will change over time, obviously.

2. Those are active funds with staggering expense ratios (0.92% and 1.38%). There is no way to guess what they might have done historically since they are active funds.

3. Who knows? Why do you think it is something that has a simple answer?

Developed Markets have a return of 12.75% so far this year. If you're going to performance chase, at least do it right with current data.
dbr wrote:
Christian NY wrote: I don't like International (0.56% annual return for Developed Markets???)
That is not an estimate of the expected return from international developed markets. Where did you get that number?
That's what Vanguard quotes for the fund's performance since inception (2007) for VEA.

retiredjg
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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by retiredjg » Sat Apr 22, 2017 9:32 am

Christian, when you speak in "ticker" you will get less help because people are not willing to look then all up. If you want the widest range of responses, do all that you can to make it easy to help you. :happy

dbr
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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by dbr » Sat Apr 22, 2017 9:34 am

AlohaJoe wrote:
That's what Vanguard quotes for the fund's performance since inception (2007) for VEA.
Maybe someday the SEC will make it illegal to quote data like that.

NiceUnparticularMan
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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by NiceUnparticularMan » Sat Apr 22, 2017 10:09 am

i am a proponent of investing internationally, but before you do anything, I'd strongly suggest you reflect carefully on exactly why it might make sense to do some international investing, and how much, and don't act until you are confident in your answers.

To explain why, here is a brief story. Just a few years ago really, international had recently been outperforming U.S., as it sometimes does. Back then, most of the chatter was in favor of at least some international, and a lot of it was in favor of high international allocations, like 50-50 or market weight.

Then for a few years, U.S. outperformed international, as it sometimes does. Now more of the chatter is questioning the need for international at all, and more people are at least saying allocations should be kept low, like 20% or less.

OK, so suppose a new investor now goes with the current conventional wisdom and allocates 10% to international. Then suppose over the next few years, international outperforms U.S., and the conventional wisdom changes again. That investor, seeing all those extra returns in international, and hearing all that chatter, might start thinking, "You know, those arguments for 50-50 or market weight actually might make some sense." So finally they decide to go from 10% to 50%.

And then for the next few years, U.S. outperforms international, and the conventional wisdom swings again.

So here's the thing. If that investor had gone 50-50 right away and stuck with it, they would have been better off. If they had stuck with 10-90, they would also have been better off. But by following the conventional wisdom, they underperformed either of those options.

Now to be sure, sometimes the conventional wisdom will end up right. But often it is wrong, and that randomness is introducing a risk you don't need to take.

In the alternative, if you can come up with a view on this you personally really believe, one which will keep you steady no matter how U.S. and international are doing against each other, you might be able to eliminate that risk. That's harder than it sounds--the temptation to change your mind when you see others doing better with a different strategy can be very hard to resist. But at least if you do your best, you have a fighting chance.

Personally, a long time ago I set a 40% international target (of stocks). In recent years, it did not serve me particularly well. But that's OK, because I haven't changed my mind about why I was doing that, and in fact all the rebalancing I have been doing into international stocks is something I view as a positive (I have been buying more international assets than I otherwise could have afforded). But that's me--you have to figure out what truly makes sense to you.

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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by stlutz » Sat Apr 22, 2017 10:09 am

Emerging performs better over time
One things to always watch out for is verb tenses. What you should say is that "emerging has performed better over time." I say that not to be pedantic, but to point out that variations in performance generally result from events that could not have been anticipated ahead of time.

Long-term performance of emerging markets reflects the fact that many countries transitioned from centrally-planned economies to semi-free ones over that time. Was this ordained ahead of time by history? I don't think so. North Korea didn't follow the trend, after all.

Since the 2008 financial crisis, US markets have outperformed European ones. A lot of this is due to currency reasons--the dollar has been a stronger currency than the Euro, which has made European stock returns worse in US dollar terms. This resulted from the fact that the US more successfully addressed the challenges posed by the crisis than did Europe. Was this foreordained? Is it necessarily the case that Americans are smarter than Europeans? (putting a big :D next to that one!).

The reason we advocate for broad diversification is that we don't know ahead of time what's going to happen and how that will impact individual markets. I always want to have exposure to the markets that are doing the best. As such, I own all of them.

Historical returns don't matter to me nearly as much as future ones.

Christian NY
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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by Christian NY » Sat Apr 22, 2017 11:51 am

dbr wrote:
Christian NY wrote: I don't like International (0.56% annual return for Developed Markets???)
That is not an estimate of the expected return from international developed markets. Where did you get that number?
I apologize, I should have stated that more clearly.
https://personal.vanguard.com/us/funds/ ... IntExt=INT
0.56% annual return over 10 years (will be 10 years in July)
P.S. I am going in with one lump sum(no dollar cost averaging) of $500k.

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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by GLState » Sat Apr 22, 2017 12:31 pm

Christian...You don't like international simply because of past returns? At some point, you're going to hate every asset in your portfolio. Buying based on past performance is the wrong way to invest. Over the past couple of week's you've kept adding funds solely based on past performance without considering the costs. The SEC tells us " past performance does not necessarily predict future results". A Morningstar study found that fund expenses are the best predictor of future returns.
http://beta.morningstar.com/articles/75 ... ilure.html
http://www.mymoneyblog.com/morningstar- ... tings.html

All experienced don't say that we have to invest in foreign funds. You'll find a wide range of allocations here from 0% to 50% or more. In general, I would say those here look at funds as an asset class rather than as a fund that we are continuously trying to upgrade. We are happy with what the market gives us for that asset class. We look for low-cost funds, so our returns come to us rather than go to a fund company.

(1) If returns for a fund only go back 5 years, you can't reliably determine what they would have done it the past. We don't know what their investments would have been or their expenses. If you want to compare funds, you can only compare for the years that you have data. Simple as that!

(2) We don't know what the best allocation will be for Developed and Emerging markets. We only know what the best allocation was...and that doesn't help us to predict tomorrow, next month, or next year. If you want to see what were the best allocations for asset classes, excel's optimizer would be a good choice. But, you might find it easier to simulate portfolios with varying compositions in Portfolio Visualizer.... 100/0, 90/10, 80/20, 70/30, 60/40, developed to emerging markets to see where the sweet spot was.

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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by ACM4297 » Sat Apr 22, 2017 1:14 pm

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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by staythecourse » Sat Apr 22, 2017 1:27 pm

dbr wrote:
AlohaJoe wrote:
That's what Vanguard quotes for the fund's performance since inception (2007) for VEA.
Maybe someday the SEC will make it illegal to quote data like that.
Good one.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by jalbert » Sat Apr 22, 2017 2:22 pm

1. No, VXUS is not composed of VEA and VWO in any meaningful sense. However, you can replicate VXUS by mixing together VEA and VWO in your own portfolio.
VWO tracks an index that includes China A-shares, VXUS tracks an index that currently excludes China A-shares.

If you specifically want China A-shares, or want to change the mix of developed and emerging markets to differ from market weight, you would choose a mix of vea and vwo. Holding VXUS is easier to manage. IXUS is likely to be a little more tax efficient than VXUS in a taxable account, although VXUS is fine in a taxable account. VXUS is preferred over IXUS in a tax-qualified account is VXUS pays out less in foreign taxes.
Risk is not a guarantor of return.

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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by whodidntante » Sat Apr 22, 2017 2:31 pm

I overweight EM small and value and limit it to 17% of my total portfolio, meaning I'll sell quite a bit if it crosses that. And it did this year. It's been my best performing investment recently. Developed ex-US has also outpaced the US, at least my stuff has. I overweight small and value there also.

Christian NY
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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by Christian NY » Mon Apr 24, 2017 10:27 am

dbr wrote:
AlohaJoe wrote:
That's what Vanguard quotes for the fund's performance since inception (2007) for VEA.
Maybe someday the SEC will make it illegal to quote data like that.
dbr,
May I ask why you feel that way?
If someone went in 10 years ago with one lump sum, no dollar cost averaging(which is my current situation btw), wouldn't their annual return actually be 0.56% per year?

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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by Christian NY » Mon Apr 24, 2017 10:40 am

retiredjg wrote:Christian, when you speak in "ticker" you will get less help because people are not willing to look then all up. If you want the widest range of responses, do all that you can to make it easy to help you. :happy
You are absolutely right, and I did see your reply to the guy who posted 50 ticker symbols without the fund names that are available in his 401k :mrgreen: In this particular case, I assumed since this is a pro-Vanguard forum everyone knows VXUS, VEA and VWO.
I have corrected my post to include the names.
BTW, what do you think is the best allocation of International in a portfolio and what is the best split between VEA and VWO if I wanted to hold them individually? I know a common answer is "it depends" but if you were to guess what will perform best over a long time period(20 yrs) what would it be?
Thank you.

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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by rkhusky » Mon Apr 24, 2017 10:53 am

stlutz wrote:
Emerging performs better over time
One things to always watch out for is verb tenses. What you should say is that "emerging has performed better over time." I say that not to be pedantic, but to point out that variations in performance generally result from events that could not have been anticipated ahead of time.
Vanguard's Emerging Markets Index is still down 30% from it's high in late 2007.

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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by AlohaJoe » Mon Apr 24, 2017 11:35 am

Christian NY wrote:
dbr wrote:
AlohaJoe wrote:
That's what Vanguard quotes for the fund's performance since inception (2007) for VEA.
Maybe someday the SEC will make it illegal to quote data like that.
dbr,
May I ask why you feel that way?
If someone went in 10 years ago with one lump sum, no dollar cost averaging(which is my current situation btw), wouldn't their annual return actually be 0.56% per year?
If someone invested in the Vanguard Developed Markets funds

...January 2007, their return until now would be 1.75%
...July 2006, their return until now would be 2.96% (almost double, just by investing 6 months sooner)
...July 2007, their return until now would be 0.77% (almost half, just by investing 6 months later)

In other words the "long term return" can vary by a factor of 4 just by shifting the starting date around +/- 6 months.

Sometimes the start or end date has a big impact on things like "10 year returns". Everyone in the world knows about the crash in 2008 so it is easy to guess (without looking at the data) that returns from 2007-now have a chance of looking wonky.

If you look at the most recent 10 years then international looks bad. If you look at the 10 years before that then the US looks bad.

What will the next 10 years look like?

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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by jhfenton » Mon Apr 24, 2017 11:39 am

rkhusky wrote:
stlutz wrote:
Emerging performs better over time
One things to always watch out for is verb tenses. What you should say is that "emerging has performed better over time." I say that not to be pedantic, but to point out that variations in performance generally result from events that could not have been anticipated ahead of time.
Vanguard's Emerging Markets Index is still down 30% from it's high in late 2007.
Vanguard's Emerging Markets Stock Index Fund Admiral Shares (VEMAX) is 10.44% below its 10/31/2007 high. (It lost nearly 64% between October 2007 and October 2008.) Perhaps your number excludes dividends?

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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by livesoft » Mon Apr 24, 2017 11:42 am

This thread demonstrates the dangers of looking at long-term past performance in order to decide on an asset allocation and specifically whether to invest in international funds or not. It also shows the danger of investing one-time and never again. It also shows the danger of not rebalancing one's portfolio.

If one can figure out how to use rebalancing triggers to buy low, then one can do well. Vg Developed markets is up 7.4% YTD through yesterday and will probably be up more than 9% YTD by the end of the day. The one-year return will be about 14%, so most of the last one-year return will come from the months in 2017.

One has to learn to invest in broad market indexes when they stink.
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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by triceratop » Mon Apr 24, 2017 11:43 am

rkhusky wrote:
stlutz wrote:
Emerging performs better over time
One things to always watch out for is verb tenses. What you should say is that "emerging has performed better over time." I say that not to be pedantic, but to point out that variations in performance generally result from events that could not have been anticipated ahead of time.
Vanguard's Emerging Markets Index is still down 30% from it's high in late 2007.
No it's not. Maybe by price return, but by total return which is all that really matters it is down only 7.4%.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by retiredjg » Mon Apr 24, 2017 12:37 pm

Christian NY wrote:BTW, what do you think is the best allocation of International in a portfolio....
My preference is just use the Total International Index - VXUS. If you want to tilt to small, add on a little of Vanguard's FTSE All World Except US Small Cap fund.
.... and what is the best split between VEA and VWO if I wanted to hold them individually?
For me, something close to market weight would be the "best split". Last I looked, market weight would be something like 75% Developed Markets and 25% Emerging Markets.

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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by alex_686 » Mon Apr 24, 2017 12:58 pm

International has preformed badly over the past 10 years. Another way to look at this is that the US has had an exceptional 10 years. Some of this is due to one time events, like the strengthening of the dollar and the fall of the Euro. Also, over the past 10 years the market has favored growth, mega-caps, and leverage. US companies are over weighted in these sectors. Will the next 10 years favor these factors? Maybe yes, maybe no. I would not put too heavy a weight on past performance.
Christian NY wrote: 2) Historical data for the combination of FMIJX and BEXFX only goes back 5 years as BEXFX did not exist before. How would I go about estimating hitorical returns of a portfolio including years those funds didn't exist. I realize the answer may be "they didn't exist, it's impossible" but if you wanted to compare the performance of VXUS vs. FMIJX/BEXFX how would you approach this task?
I know that the general advice on this forum to always go with low-cost ETFs and not even debate the issue but what if I wanted to compare portfolio results with 10% VEA/5% VWO to 10% FMIJX/5% BEXFX? How would I go about doing that?
Here is a good example. Why did one index out preform another?

Was it due to how the index was constructed? Is it poorly set up with many stock arbitrage possibilities, allowing hedge funds to front run and capture some of the gain? Does it have too many small illiquid companies in the index resulting in significant trading costs?

Was it due to luck? A index with fewer companies will have a higher variance of returns, resulting in randomly higher or lower returns than a big index. Some indexes have Korea has a emerging market, others not. Korea has had a good decade. Those indexes with Korea would have done better. Will Korea have a better than average performance over the next 10 years? Who knows?

The answer here is that you can't use past performance. You are going to need to tear apart the indexes and figure out how they work. Then figure out which one works better for you.

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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by rkhusky » Mon Apr 24, 2017 2:32 pm

jhfenton wrote:
rkhusky wrote:
stlutz wrote:
Emerging performs better over time
One things to always watch out for is verb tenses. What you should say is that "emerging has performed better over time." I say that not to be pedantic, but to point out that variations in performance generally result from events that could not have been anticipated ahead of time.
Vanguard's Emerging Markets Index is still down 30% from it's high in late 2007.
Vanguard's Emerging Markets Stock Index Fund Admiral Shares (VEMAX) is 10.44% below its 10/31/2007 high. (It lost nearly 64% between October 2007 and October 2008.) Perhaps your number excludes dividends?
triceratop wrote:
No it's not. Maybe by price return, but by total return which is all that really matters it is down only 7.4%.
I thought Yahoo's adjusted price adjusted for dividends. When I checked this morning Yahoo had Emerging Markets at 36.8 on 10/31/07 and 25.1 today.

edit: Just checked Vanguard and 36.8 was the price on 10/31/07 and a closer look at Yahoo shows that the page I was looking at did not adjust for dividends, even though they had a column labeled adjusted price.

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Re: A few questions about International... VXUS, VEA, VWO... low returns

Post by dbr » Mon Apr 24, 2017 3:14 pm

Christian NY wrote:
dbr wrote:
AlohaJoe wrote:
That's what Vanguard quotes for the fund's performance since inception (2007) for VEA.
Maybe someday the SEC will make it illegal to quote data like that.
dbr,
May I ask why you feel that way?
If someone went in 10 years ago with one lump sum, no dollar cost averaging(which is my current situation btw), wouldn't their annual return actually be 0.56% per year?
The reason to not allow this is that it implies a promise of future performance that can't be guaranteed. They are already under law required to state that past performance may not be an indicator of future performance (as part or consequence of SEC Rule 156), so it is inconsistent to even be able to publish past performance as part of marketing or informational materials.

In any case the practical objection is that many investors will use this information to select funds or to devise investment plans, and this is a mistake. The counter argument is that facts are facts and investors bear some responsibility for their own choices. The whole thing falls somewhat in the same class as tobacco or alcohol health warnings on those products.

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