Please help me sensibly add EM and Dev into my portfolio

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WanderingDoc
Posts: 1034
Joined: Sat Aug 05, 2017 8:21 pm

Please help me sensibly add EM and Dev into my portfolio

Post by WanderingDoc » Sun Feb 18, 2018 3:23 pm

Inspired by this thread: viewtopic.php?f=1&t=241997

I have wanted to add some Emerging and Developing markets into my asset allocation since I have started to take the Bogle style of investing pretty seriously. ~ 5 months ago.

The following is my current asset allocation:
(Not counting real estate equity or passive equity partnerships in real estate, which would comprise ~80% of overall portfolio)

50% Cash

50% Securities (percentages that follow are of overall non-cash portfolio)

34 % TSP - 10% bonds, 90% stocks. Right now contributions are 80% International, 10% small cap, 10% G-fund.
12 % Vanguard Roth IRA: Target Retirement fund 2055
54 % Vanguard Taxable: VTSAX

As you can see the mutual fund side of my portfolio is pretty straight forward.

I am trying to add in 5-10% Emerging markets, and 5-10% Developing markets, as a percentage of the overall mutual fund portfolio.
ie. 10% bonds, 5-10% EM, 5-10% Dev.

I know tinkering is not generally advised, but securities are a secondary "fun" aspect of my overall investing, and I have always wanted more exposure to "riskier", less developed nations. Thank you very much in advance for your input. Please help me with how to add this in the most tax-advantaged way possible.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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ruralavalon
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Location: Illinois

Re: Please help me sensibly add EM and Dev into my portfolio

Post by ruralavalon » Sun Feb 18, 2018 4:24 pm

WanderingDoc wrote:
Sun Feb 18, 2018 3:23 pm
Inspired by this thread: viewtopic.php?f=1&t=241997

I have wanted to add some Emerging and Developing markets into my asset allocation since I have started to take the Bogle style of investing pretty seriously. ~ 5 months ago.

The following is my current asset allocation:
(Not counting real estate equity or passive equity partnerships in real estate, which would comprise ~80% of overall portfolio)

50% Cash

50% Securities (percentages that follow are of overall non-cash portfolio)

34 % TSP - 10% bonds, 90% stocks. Right now contributions are 80% International, 10% small cap, 10% G-fund.
12 % Vanguard Roth IRA: Target Retirement fund 2055
54 % Vanguard Taxable: VTSAX

As you can see the mutual fund side of my portfolio is pretty straight forward.

I am trying to add in 5-10% Emerging markets, and 5-10% Developing markets, as a percentage of the overall mutual fund portfolio.
ie. 10% bonds, 5-10% EM, 5-10% Dev.

I know tinkering is not generally advised, but securities are a secondary "fun" aspect of my overall investing, and I have always wanted more exposure to "riskier", less developed nations. Thank you very much in advance for your input. Please help me with how to add this in the most tax-advantaged way possible.
In your TSP account you can use the I Fund for stocks of companies in developed markets. In the next year or two the I Fund will add coverage for stocks of companies in emerging markets.

OR, if you don't want to delay adding stocks of companies in emerging markets, then in your Roth IRA exchange from the target date fund to Vanguard Emerging Markets Index Fund, or to Vanguard Total International Stock Index Fund (which covers both developed and emerging markets).
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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whodidntante
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Joined: Thu Jan 21, 2016 11:11 pm

Re: Please help me sensibly add EM and Dev into my portfolio

Post by whodidntante » Sun Feb 18, 2018 4:31 pm

The TSP I fund is fine, and will soon include emerging markets. If you want more EM than that, you could buy an emerging markets index fund at Vanguard. For example, this one. You would sell some of the target retirement fund to generate cash for it, or use some of your 50% cash allocation to buy it in taxable. As an aside, you seem really cash heavy. Do you want to be?

https://personal.vanguard.com/us/funds/ ... irect=true

WanderingDoc
Posts: 1034
Joined: Sat Aug 05, 2017 8:21 pm

Re: Please help me sensibly add EM and Dev into my portfolio

Post by WanderingDoc » Sun Feb 18, 2018 4:38 pm

ruralavalon wrote:
Sun Feb 18, 2018 4:24 pm
WanderingDoc wrote:
Sun Feb 18, 2018 3:23 pm
Inspired by this thread: viewtopic.php?f=1&t=241997

I have wanted to add some Emerging and Developing markets into my asset allocation since I have started to take the Bogle style of investing pretty seriously. ~ 5 months ago.

The following is my current asset allocation:
(Not counting real estate equity or passive equity partnerships in real estate, which would comprise ~80% of overall portfolio)

50% Cash

50% Securities (percentages that follow are of overall non-cash portfolio)

34 % TSP - 10% bonds, 90% stocks. Right now contributions are 80% International, 10% small cap, 10% G-fund.
12 % Vanguard Roth IRA: Target Retirement fund 2055
54 % Vanguard Taxable: VTSAX

As you can see the mutual fund side of my portfolio is pretty straight forward.

I am trying to add in 5-10% Emerging markets, and 5-10% Developing markets, as a percentage of the overall mutual fund portfolio.
ie. 10% bonds, 5-10% EM, 5-10% Dev.

I know tinkering is not generally advised, but securities are a secondary "fun" aspect of my overall investing, and I have always wanted more exposure to "riskier", less developed nations. Thank you very much in advance for your input. Please help me with how to add this in the most tax-advantaged way possible.
In your TSP account you can use the I Fund for stocks of companies in developed markets. In the next year or two the I Fund will add coverage for stocks of companies in emerging markets.

OR, if you don't want to delay adding stocks of companies in emerging markets, then in your Roth IRA exchange from the target date fund to Vanguard Emerging Markets Index Fund, or to Vanguard Total International Stock Index Fund (which covers both developed and emerging markets).
Thanks, that is helpful. I am kind of scared to sell and buy funds within the Roth IRA, for fear of screwing things up. I guess its all tax protected so one can mess around as many times within that account without problems?
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

WanderingDoc
Posts: 1034
Joined: Sat Aug 05, 2017 8:21 pm

Re: Please help me sensibly add EM and Dev into my portfolio

Post by WanderingDoc » Sun Feb 18, 2018 4:42 pm

whodidntante wrote:
Sun Feb 18, 2018 4:31 pm
The TSP I fund is fine, and will soon include emerging markets. If you want more EM than that, you could buy an emerging markets index fund at Vanguard. For example, this one. You would sell some of the target retirement fund to generate cash for it, or use some of your 50% cash allocation to buy it in taxable. As an aside, you seem really cash heavy. Do you want to be?

https://personal.vanguard.com/us/funds/ ... irect=true
Any fundamental difference between buying it in taxable or exchanging for it within the Roth IRA? Aside from the tax consequences, does making the decision to do it in one vs. the other make a difference in the allocation or how one would think about it?

I usually try to stay cash heavy to be able to jump on a good real estate deal if it comes along. Lately, those have been very rare in terms of individual properties as a sole owner. I've been meaning to move it to Ally since its been in a savings account earning 0.2% all these years :oops:
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

desafinado
Posts: 106
Joined: Wed Dec 28, 2016 3:14 am

Re: Please help me sensibly add EM and Dev into my portfolio

Post by desafinado » Sun Feb 18, 2018 4:43 pm

International (and EM funds especially) tend to have higher dividend yield so I think in general it would be more advantageous to have them in tax-protected accounts.

WanderingDoc
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Joined: Sat Aug 05, 2017 8:21 pm

Re: Please help me sensibly add EM and Dev into my portfolio

Post by WanderingDoc » Sun Feb 18, 2018 4:51 pm

Does anyone have information as to what % of the TSP I fund is devoted to Developing Markets .. do they publish that. Or even still, about how much of the I fund will be in EM next year. I suspect we do not know the answer to the latter, but surely the former?

I am looking to specifically invest in companies in India, Russia, Singapore, and China. Sorry, I'm a newbie to the stock market game.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

drk
Posts: 717
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Location: Seattle

Re: Please help me sensibly add EM and Dev into my portfolio

Post by drk » Sun Feb 18, 2018 4:52 pm

desafinado wrote:
Sun Feb 18, 2018 4:43 pm
International (and EM funds especially) tend to have higher dividend yield so I think in general it would be more advantageous to have them in tax-protected accounts.
EM also has a higher percentage of non-qualified dividends, with only 48% qualified in 2017.

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whodidntante
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Re: Please help me sensibly add EM and Dev into my portfolio

Post by whodidntante » Sun Feb 18, 2018 5:13 pm

WanderingDoc wrote:
Sun Feb 18, 2018 4:42 pm
whodidntante wrote:
Sun Feb 18, 2018 4:31 pm
The TSP I fund is fine, and will soon include emerging markets. If you want more EM than that, you could buy an emerging markets index fund at Vanguard. For example, this one. You would sell some of the target retirement fund to generate cash for it, or use some of your 50% cash allocation to buy it in taxable. As an aside, you seem really cash heavy. Do you want to be?

https://personal.vanguard.com/us/funds/ ... irect=true
Any fundamental difference between buying it in taxable or exchanging for it within the Roth IRA? Aside from the tax consequences, does making the decision to do it in one vs. the other make a difference in the allocation or how one would think about it?

I usually try to stay cash heavy to be able to jump on a good real estate deal if it comes along. Lately, those have been very rare in terms of individual properties as a sole owner. I've been meaning to move it to Ally since its been in a savings account earning 0.2% all these years :oops:
Tax wise, it's a mixed bag. EM valuations are currently low compared to US stocks, and the dividend yield is higher partly due to the that. An EM index will also has a lower percentage of qualified dividends than a US total stock index. However, you get a tax credit for foreign tax withheld, which you'll miss out on if you have EM in tax advantaged. Overall it's more expensive tax wise than holding a US total stock index, but not as bad as bonds or REITs.

Personally I hold a lot of EM in taxable because I want to overweight EM and I ran out of space in tax advantaged accounts, after considering other priorities. In your spot I would sell some of the target date fund in tax advantaged, buy EM there, and buy a US stock index in taxable.

There are several threads on tax efficiency that you can find by searching. You can read for hours about it.

Angst
Posts: 1825
Joined: Sat Jun 09, 2007 11:31 am

Re: Please help me sensibly add EM and Dev into my portfolio

Post by Angst » Sun Feb 18, 2018 6:09 pm

WanderingDoc wrote:
Sun Feb 18, 2018 3:23 pm
Inspired by this thread: viewtopic.php?f=1&t=241997

I have wanted to add some Emerging and Developing markets into my asset allocation since I have started to take the Bogle style of investing pretty seriously. ~ 5 months ago.

The following is my current asset allocation:
(Not counting real estate equity or passive equity partnerships in real estate, which would comprise ~80% of overall portfolio)

50% Cash

50% Securities (percentages that follow are of overall non-cash portfolio)

34 % TSP - 10% bonds, 90% stocks. Right now contributions are 80% International, 10% small cap, 10% G-fund.
12 % Vanguard Roth IRA: Target Retirement fund 2055
54 % Vanguard Taxable: VTSAX

As you can see the mutual fund side of my portfolio is pretty straight forward.

I am trying to add in 5-10% Emerging markets, and 5-10% Developing markets, as a percentage of the overall mutual fund portfolio.
ie. 10% bonds, 5-10% EM, 5-10% Dev.

I know tinkering is not generally advised, but securities are a secondary "fun" aspect of my overall investing, and I have always wanted more exposure to "riskier", less developed nations. Thank you very much in advance for your input. Please help me with how to add this in the most tax-advantaged way possible.
I see International stocks routinely broken out into both Developed Markets and Emerging Markets, but you appear to want to target a third sub-group you call "Developing Markets". I don't recall seeing "Developing" discussed on the forum as something separate from "Emerging", and I don't see Vanguard funds addressing it. You appear to already own a good amount of "Developed" (International) Markets, so I'd otherwise simply recommend buying Emerging Markets on top of that. Why are you separating out "Developing"? The BH thread you reference doesn't bring it up.

WanderingDoc
Posts: 1034
Joined: Sat Aug 05, 2017 8:21 pm

Re: Please help me sensibly add EM and Dev into my portfolio

Post by WanderingDoc » Sun Feb 18, 2018 6:24 pm

whodidntante wrote:
Sun Feb 18, 2018 5:13 pm
WanderingDoc wrote:
Sun Feb 18, 2018 4:42 pm
whodidntante wrote:
Sun Feb 18, 2018 4:31 pm
The TSP I fund is fine, and will soon include emerging markets. If you want more EM than that, you could buy an emerging markets index fund at Vanguard. For example, this one. You would sell some of the target retirement fund to generate cash for it, or use some of your 50% cash allocation to buy it in taxable. As an aside, you seem really cash heavy. Do you want to be?

https://personal.vanguard.com/us/funds/ ... irect=true
Any fundamental difference between buying it in taxable or exchanging for it within the Roth IRA? Aside from the tax consequences, does making the decision to do it in one vs. the other make a difference in the allocation or how one would think about it?

I usually try to stay cash heavy to be able to jump on a good real estate deal if it comes along. Lately, those have been very rare in terms of individual properties as a sole owner. I've been meaning to move it to Ally since its been in a savings account earning 0.2% all these years :oops:
Tax wise, it's a mixed bag. EM valuations are currently low compared to US stocks, and the dividend yield is higher partly due to the that. An EM index will also has a lower percentage of qualified dividends than a US total stock index. However, you get a tax credit for foreign tax withheld, which you'll miss out on if you have EM in tax advantaged. Overall it's more expensive tax wise than holding a US total stock index, but not as bad as bonds or REITs.

Personally I hold a lot of EM in taxable because I want to overweight EM and I ran out of space in tax advantaged accounts, after considering other priorities. In your spot I would sell some of the target date fund in tax advantaged, buy EM there, and buy a US stock index in taxable.

There are several threads on tax efficiency that you can find by searching. You can read for hours about it.
Thanks for your feedback. Why would you say to "buy a US stock index in taxable"? My taxable account has solely VTSAX and thats already like 55% of my entire portfolio!

Yes I could sell some of the Roth IRA and put in EM, but it contains such a small account dollars wise it may make sense to wait until 1/2/2019 and just dump the $5.5K backdoor Roth into EM :)

Right now, the TSP is allocated 80% to the I fund. Going forward, I am doing 40% C-fund, 40% I-fund but perhaps I need to lower the amount going into the C fund until the TSP catches up and surpasses the taxable account in VTSAX.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

WanderingDoc
Posts: 1034
Joined: Sat Aug 05, 2017 8:21 pm

Re: Please help me sensibly add EM and Dev into my portfolio

Post by WanderingDoc » Sun Feb 18, 2018 6:28 pm

Angst wrote:
Sun Feb 18, 2018 6:09 pm
WanderingDoc wrote:
Sun Feb 18, 2018 3:23 pm
Inspired by this thread: viewtopic.php?f=1&t=241997

I have wanted to add some Emerging and Developing markets into my asset allocation since I have started to take the Bogle style of investing pretty seriously. ~ 5 months ago.

The following is my current asset allocation:
(Not counting real estate equity or passive equity partnerships in real estate, which would comprise ~80% of overall portfolio)

50% Cash

50% Securities (percentages that follow are of overall non-cash portfolio)

34 % TSP - 10% bonds, 90% stocks. Right now contributions are 80% International, 10% small cap, 10% G-fund.
12 % Vanguard Roth IRA: Target Retirement fund 2055
54 % Vanguard Taxable: VTSAX

As you can see the mutual fund side of my portfolio is pretty straight forward.

I am trying to add in 5-10% Emerging markets, and 5-10% Developing markets, as a percentage of the overall mutual fund portfolio.
ie. 10% bonds, 5-10% EM, 5-10% Dev.

I know tinkering is not generally advised, but securities are a secondary "fun" aspect of my overall investing, and I have always wanted more exposure to "riskier", less developed nations. Thank you very much in advance for your input. Please help me with how to add this in the most tax-advantaged way possible.
I see International stocks routinely broken out into both Developed Markets and Emerging Markets, but you appear to want to target a third sub-group you call "Developing Markets". I don't recall seeing "Developing" discussed on the forum as something separate from "Emerging", and I don't see Vanguard funds addressing it. You appear to already own a good amount of "Developed" (International) Markets, so I'd otherwise simply recommend buying Emerging Markets on top of that. Why are you separating out "Developing"? The BH thread you reference doesn't bring it up.
Sorry, I must have had it confused. So Developing and Emerging is one and the same. It appears then that International is broken up into only 2 subcategories, Developed and Developing (aka Emerging)? This makes the TSP I fund look even worse, as it doesn't include one out of only two international categories.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

drk
Posts: 717
Joined: Mon Jul 24, 2017 10:33 pm
Location: Seattle

Re: Please help me sensibly add EM and Dev into my portfolio

Post by drk » Sun Feb 18, 2018 6:47 pm

WanderingDoc wrote:
Sun Feb 18, 2018 6:28 pm
Sorry, I must have had it confused. So Developing and Emerging is one and the same. It appears then that International is broken up into only 2 subcategories, Developed and Developing (aka Emerging)? This makes the TSP I fund look even worse, as it doesn't include one out of only two international categories.
Generally, that's the classification used: Developed and Emerging. For VTIAX, Morningstar calls it an 82/18 split. However, if you look at the EM holdings of funds like Total International (FTSE Global All Cap ex-US Index) or FTSE Emerging Markets, you'll notice that they only include about 26 emerging market countries. The missing ones (e.g., Vietnam, Nigeria) are sometimes classified as Frontier Markets, but Vanguard doesn't offer any products that include them.

Angst
Posts: 1825
Joined: Sat Jun 09, 2007 11:31 am

Re: Please help me sensibly add EM and Dev into my portfolio

Post by Angst » Sun Feb 18, 2018 7:34 pm

drk wrote:
Sun Feb 18, 2018 6:47 pm
WanderingDoc wrote:
Sun Feb 18, 2018 6:28 pm
Sorry, I must have had it confused. So Developing and Emerging is one and the same. It appears then that International is broken up into only 2 subcategories, Developed and Developing (aka Emerging)? This makes the TSP I fund look even worse, as it doesn't include one out of only two international categories.
Generally, that's the classification used: Developed and Emerging. For VTIAX, Morningstar calls it an 82/18 split. However, if you look at the EM holdings of funds like Total International (FTSE Global All Cap ex-US Index) or FTSE Emerging Markets, you'll notice that they only include about 26 emerging market countries. The missing ones (e.g., Vietnam, Nigeria) are sometimes classified as Frontier Markets, but Vanguard doesn't offer any products that include them.
Yes, it sounds like you've got it right now. Do note however, that at the margin of Developed vs Emerging, one index provider's "Developed Mrkt" country can be another index provider's "Emerging Mrkt" country. Korea is a good example here. So if your developed market fund includes Korea, e.g., when you pick your Emerging market fund(s) you might want to avoid an index that includes Korea as well. Things can get a little messy. Even so, it wouldn't be the end of the world to have a little overlap. Also, as drk pointed out, Frontier Markets are a third international group on the fringes of "developing/emerging". I would discourage anyone from worrying about them at all. There are many weaknesses with the available funds/indexes that address them and most people on the forum whose advice I value do not touch them.

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