High volatility/returns (SC,EM) for young investors ?

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wapiti22
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High volatility/returns (SC,EM) for young investors ?

Post by wapiti22 » Sat Jan 27, 2018 1:20 pm

Based on the historical data, emerging market and small-cap stocks have a higher return (and higher volatility) on the long-term than total world market, wouldn't be better for young investors (20-30 years old) who don't need money in the short-mid term to invest mainly (or all their portfolio) in small world (including US) and emerging markets stocks ?

My opinion is that investing in higher volatility/return stocks is a risk arbitrage like choosing to have a portfolio only of stocks instead of a mix bond/stocks.

What is the pro/cons of this idea/strategy?

ChinchillaWhiplash
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Re: High volatility/returns (SC,EM) for young investors ?

Post by ChinchillaWhiplash » Sat Jan 27, 2018 1:55 pm

Might do well over long term, but who knows? US market has a longer track record, but could change too. If you are willing to take the risk, why not? Could give big returns. If you have bonds in the mix, when the equities go down, you balance and sell some bonds and buy equities on the cheap. Probably would be best to hold something along these lines for that reason. Probably at least 10% of portfolio. Will more than likely gain more by doing so. My $.02

MikeMak27
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Re: High volatility/returns (SC,EM) for young investors ?

Post by MikeMak27 » Sat Jan 27, 2018 7:38 pm

I highly recommend going all in on us small cap value and emerging markets for your equity portion of your portfolio if you have decades before retirement. I am 45% us small cap value, 40% emerging market, 10% us long term treasuries, and 5% reits. These two asset classes have the lowest correlation when you compare, s&p 500, developed markets large cap, emerging markets, and small value. As a result, there is huge 4%/20% re balancing band opportunities. When the dollar is strong, small value will lead the charge. When the dollar is weak, emerging markets usually lead. As a result, small value has underperformed the s&p in 2017 and so far this month, but absolutely crushed it in 2016. Emerging markets has outperformed developed markets in this time by a nice amount. Additionally, emerging markets have better market valuations compared to developed markets. I would also, include a long term bond fund, to allow for re balancing opportunities if stocks sell off. IEMG, IJS, and TLT are a great trio to implement this strategy if you're with fidelity. For small value, make sure you avoid russell 2000 index products as they vastly under perform FTSE, MSCI, and S&P 600 indices.
Mac 4 fund portfolio: 45% US small cap value (IJS, VBR), 40% Emerging Markets (IEMG, VWO, FPMAX), 10% long term US treasuries (TLT), 5% US REITS (VNQ)

Elbowman
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Re: High volatility/returns (SC,EM) for young investors ?

Post by Elbowman » Sat Jan 27, 2018 7:51 pm

There is also historical data suggesting untested investors overestimate their ability to stay the course in a crash. Being 100% invested in extremely volatile funds seems like it would make that tendency worse.

golfCaddy
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Re: High volatility/returns (SC,EM) for young investors ?

Post by golfCaddy » Sat Jan 27, 2018 7:53 pm

Why do you say EM has higher returns? VEIEX has dramatically under-performed the SP500 since its inception in 1994.

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whodidntante
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Re: High volatility/returns (SC,EM) for young investors ?

Post by whodidntante » Sat Jan 27, 2018 7:55 pm

International small and EM have just seen a period of outperformance after a long period of underperformance. I would have more confidence in your conviction if you had brought it up in early-mid 2016, when those asset classes looked awful. As it is, I think you are chasing performance.

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Watty
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Re: High volatility/returns (SC,EM) for young investors ?

Post by Watty » Sun Jan 28, 2018 12:57 am

wapiti22 wrote:
Sat Jan 27, 2018 1:20 pm
What is the pro/cons of this idea/strategy?
Being young is a double edged sword. You do have more time to make up any loses but if you lose a chunk of money that would be money that could have been invested for many decades.

One way to look at your investments is that the first dollar you save today will be the last dollar you spend when you might be 95. That means that a 25 year old could be looking at 70 year investing horizon. It is a bit of an optimistic projection but it is possible that you could get a 7.2% real return on a more conventional portfolio so your money would double about every 10 years. In 70 years a thousand dollars could be worth $128,000 if it doubles seven times. That is a significant amount that would be hard to make up if you are overly aggressive now and blow $1,000.

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privatefarmer
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Re: High volatility/returns (SC,EM) for young investors ?

Post by privatefarmer » Sun Jan 28, 2018 1:03 am

Watty wrote:
Sun Jan 28, 2018 12:57 am
wapiti22 wrote:
Sat Jan 27, 2018 1:20 pm
What is the pro/cons of this idea/strategy?
Being young is a double edged sword. You do have more time to make up any loses but if you lose a chunk of money that would be money that could have been invested for many decades.

One way to look at your investments is that the first dollar you save today will be the last dollar you spend when you might be 95. That means that a 25 year old could be looking at 70 year investing horizon. It is a bit of an optimistic projection but it is possible that you could get a 7.2% real return on a more conventional portfolio so your money would double about every 10 years. In 70 years a thousand dollars could be worth $128,000 if it doubles seven times. That is a significant amount that would be hard to make up if you are overly aggressive now and blow $1,000.
yes but if you buy and hold the idea is that you would hold on during the bad times and, in the end, after many decades of investing, you would have a larger pot of gold with a more volatile portfolio. if we didn't expect higher returns in more volatile assets then nobody would own them. expectations may not pan out, but we have to make a bet today about what the next several decades will bring. you either can bet that large, domestic blue-chip stocks will outperform or you can bet that small value and/or emerging market stocks will outperform, over the long-term.

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raven15
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Re: High volatility/returns (SC,EM) for young investors ?

Post by raven15 » Sun Jan 28, 2018 1:52 am

Yeah, sure, in theory. 50% VBR, 20% VWO, 20% SCHC, 10% EDV. The real struggle is psychological when the allocation occasionally crashes and burns!
It's Time. Adding Interest.

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Portfolio7
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Re: High volatility/returns (SC,EM) for young investors ?

Post by Portfolio7 » Sun Jan 28, 2018 5:39 pm

I struggle with this on a few levels. The net is that no matter how successful your other decisions may have been, there is a lot of risk doing anything other than a highly diversified core portfolio - and you don't want that risk to materialize when you finally bet your life savings. So, I continue to focus on risk first.

For my son, who is 16 and has two summer's worth of savings (and he's very frugal), he is about 2/3 in A0A, which is about 85% stocks tilted heavily US, and 15% bonds US and Int'l. To give him what I think is a better long term balance, the other 1/3 is roughly 14% IEMG, 14% SCZ (EAFE Small Cap), and 5% short term US Trsy notes. We may reset at some point, but I have a lot on my desk, so to speak, and this seems good enough.

So yes, I buy into larger allocations than the norm for small caps and EM for the young, long term investor, though I think it's best to avoid extreme risk while remaining aggressive. Warnings on past returns extend to past correlations. Things change.
An investment in knowledge pays the best interest.

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willthrill81
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Re: High volatility/returns (SC,EM) for young investors ?

Post by willthrill81 » Sun Jan 28, 2018 5:42 pm

whodidntante wrote:
Sat Jan 27, 2018 7:55 pm
International small and EM have just seen a period of outperformance after a long period of underperformance. I would have more confidence in your conviction if you had brought it up in early-mid 2016, when those asset classes looked awful. As it is, I think you are chasing performance.
FWIW, EM still has more attractive valuations than just about any other asset class out there.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

staythecourse
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Re: High volatility/returns (SC,EM) for young investors ?

Post by staythecourse » Sun Jan 28, 2018 5:55 pm

As finance theory goes higher volatility (if you use that as a measure of risk) equals higher EXPECTED returns. So on an ex ante basis yes, but on an ex post basis not always.

I think for a young investor it is reasonable as MANY plans are reasonable as long as you stay the course with whatever you choose.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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