Larry Swedroe: Why Emerging Markets Matter

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Random Walker
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Larry Swedroe: Why Emerging Markets Matter

Post by Random Walker » Mon Oct 08, 2018 7:58 am

https://www.etf.com/sections/index-inve ... nopaging=1
Over long term EM has outperformed US. EM is more risky, long periods of underperformance, different types of risk, market prices risk well, and EM less than perfectly correlated with US. A portfolio containing EM has historically had higher risk adjusted returns than US only portfolio. EM comprises about 12% of the world market value. EM is a major league volatile asset class. In most years it has 10% drawdowns and in many years 20%. Personally, I’ve gone all in on factor investing, and am making all my new EM additions to Emerging Market Value. I’m sure that’s even more volatile, but it’s the portfolio as a whole that matters, not really any component in isolation.

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Taylor Larimore
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Re: Larry Swedroe: Why Emerging Markets Matter

Post by Taylor Larimore » Mon Oct 08, 2018 8:31 am

Bogleheads:

Vanguard Total International Stock Market Index Fund contains:
20.60% Emerging Markets
42.50% Europe
29.60% Pacific
0.40% Middle East
6.60% North America
0.30% Other
Strive for simplicity (read link below).

Best wishes.
Taylor
Last edited by Taylor Larimore on Mon Oct 08, 2018 9:17 am, edited 1 time in total.
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Re: Larry Swedroe: Why Emerging Markets Matter

Post by jhfenton » Mon Oct 08, 2018 8:53 am

Taylor Larimore wrote:
Mon Oct 08, 2018 8:31 am
Strive for simplicity (read link below).
Avoiding useless complexity makes sense. But for an asset class as volatile as emerging markets, I want to hold it separately. When it goes up 30% in a year, I want to rebalance out of it. When it drops 30% in a year, I want to rebalance into it.

I've held a separate emerging markets position since we made our first non-401(k) investments in the summer of 1998. The ups and downs have been dramatic to say the least, but they've done well for us, especially when you consider the impact of periodic investing and rebalancing.

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onthecusp
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Re: Larry Swedroe: Why Emerging Markets Matter

Post by onthecusp » Mon Oct 08, 2018 8:54 am

Taylor Larimore wrote:
Mon Oct 08, 2018 8:31 am
Bogleheads:

Vanguard Total Stock Market Index Fund contains:
20.60% Emerging Markets
42.50% Europe
29.60% Pacific
0.40% Middle East
6.60% North America
0.30% Other
Strive for simplicity (read link below).

Best wishes.
Taylor
I had no idea that TSM was so underweighted in North America!
That seems like a massive tilt away from home for North American investors.

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HomerJ
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Re: Larry Swedroe: Why Emerging Markets Matter

Post by HomerJ » Mon Oct 08, 2018 8:57 am

onthecusp wrote:
Mon Oct 08, 2018 8:54 am
Taylor Larimore wrote:
Mon Oct 08, 2018 8:31 am
Bogleheads:

Vanguard Total Stock Market Index Fund contains:
20.60% Emerging Markets
42.50% Europe
29.60% Pacific
0.40% Middle East
6.60% North America
0.30% Other
Strive for simplicity (read link below).

Best wishes.
Taylor
I had no idea that TSM was so underweighted in North America!
That seems like a massive tilt away from home for North American investors.
I'm pretty sure he meant Total International Stock Market Index Fund
The J stands for Jay

typical.investor
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Re: Larry Swedroe: Why Emerging Markets Matter

Post by typical.investor » Mon Oct 08, 2018 8:58 am

onthecusp wrote:
Mon Oct 08, 2018 8:54 am
Taylor Larimore wrote:
Mon Oct 08, 2018 8:31 am
Bogleheads:

Vanguard Total Stock Market Index Fund contains:
20.60% Emerging Markets
42.50% Europe
29.60% Pacific
0.40% Middle East
6.60% North America
0.30% Other
Strive for simplicity (read link below).

Best wishes.
Taylor

I had no idea that TSM was so underweighted in North America!
That seems like a massive tilt away from home for North American investors.
Total World is 58.73% US.

Taylor quoted Total International I think.

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Taylor Larimore
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Re: Larry Swedroe: Why Emerging Markets Matter

Post by Taylor Larimore » Mon Oct 08, 2018 9:20 am

Bogleheads:

Thank you for the correction. I did, indeed, mean Total International--not Total Stock Market.

I have edited my post.

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

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by Random Walker » Mon Oct 08, 2018 9:26 am

jhfenton wrote:
Mon Oct 08, 2018 8:53 am
Taylor Larimore wrote:
Mon Oct 08, 2018 8:31 am
Strive for simplicity (read link below).
Avoiding useless complexity makes sense. But for an asset class as volatile as emerging markets, I want to hold it separately. When it goes up 30% in a year, I want to rebalance out of it. When it drops 30% in a year, I want to rebalance into it.

I've held a separate emerging markets position since we made our first non-401(k) investments in the summer of 1998. The ups and downs have been dramatic to say the least, but they've done well for us, especially when you consider the impact of periodic investing and rebalancing.
I like your rebalancing beliefs, and my inclinations are the same. But my understanding is that it is generally more efficient to incorporate an asset class or tilt into a total market or core fund when possible. Thus I think it is more efficient to incorporate EM into a core fund, and then if want additional EM beyond what the fund holds, add a smaller amount of an EM fund. This allows internal rebalancing with other people’s money rather than your own, and avoids buying and selling when an EM country graduates out of the EM asset class. For example DFA has created a new fund that combines International small value and emerging markets, DFA World Ex US Targeted Value: DWUSX. I believe VG did something similar when it incorporated EM into an International fund.

In general it is most efficient for investors to use cheaper total market or core funds as much as possible, and then tilt to taste with smaller amounts of the more expensive asset class funds.

Dave

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by nedsaid » Mon Oct 08, 2018 9:48 am

I guess Emerging Markets are the new REITs. I heard the about the same case for REITs back in 2007 that I am hearing for Emerging Markets now. I have held both asset classes for a long time.
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Re: Larry Swedroe: Why Emerging Markets Matter

Post by Artsdoctor » Mon Oct 08, 2018 9:57 am

Holding an emerging market fund alone is somewhat problematic. Where to do you put it?

The volatility is greater so the opportunity for tax-loss harvesting would make an argument for a taxable account. Likewise, there's a foreign tax credit, also arguing for the taxable account.

However, the tax "efficiency" isn't great. A large chunk of the dividends are not qualified, being taxed as regular income and subject to the 3% NIIT. Also, the dividends, as a whole, are greater than developed markets, also creating a tax burden.

I'm not arguing for or against holding a separate emerging market fund, but I've always found it difficult to place it properly.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by Elysium » Mon Oct 08, 2018 10:05 am

I have been invested in EM / EMV since 2004 and my opinion after all these years is - 'meh' they're fine but just don't expect higher returns. I've had periods of high returns and then periods of low returns. Nature of EM is high volatility combined with high unpredictability and returns concentrated in quick bursts that comes out of nowhere followed by long periods of underperformance. One can keep holding it and hope for outperformance over 30 year periods, even then no guarantees.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by latesaver » Mon Oct 08, 2018 11:20 am

Taylor Larimore wrote:
Mon Oct 08, 2018 8:31 am
Bogleheads:

Vanguard Total International Stock Market Index Fund contains:
20.60% Emerging Markets
42.50% Europe
29.60% Pacific
0.40% Middle East
6.60% North America
0.30% Other
Strive for simplicity (read link below).

Best wishes.
Taylor
Is VXUS constructed in a comparable manner (i.e. 20% EM)?

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Taylor Larimore
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Re: Larry Swedroe: Why Emerging Markets Matter

Post by Taylor Larimore » Mon Oct 08, 2018 11:31 am

latesaver wrote:
Mon Oct 08, 2018 11:20 am
Taylor Larimore wrote:
Mon Oct 08, 2018 8:31 am
Bogleheads:

Vanguard Total International Stock Market Index Fund contains:
20.60% Emerging Markets
42.50% Europe
29.60% Pacific
0.40% Middle East
6.60% North America
0.30% Other
Strive for simplicity (read link below).

Best wishes.
Taylor
Is VXUS constructed in a comparable manner (i.e. 20% EM)?
latesaver:

Yes. It is the same.

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

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by iceport » Mon Oct 08, 2018 1:26 pm

nedsaid wrote:
Mon Oct 08, 2018 9:48 am
I guess Emerging Markets are the new REITs. I heard the about the same case for REITs back in 2007 that I am hearing for Emerging Markets now. I have held both asset classes for a long time.
While it's important to put the latest observations from even the best authorities into a broader context, and to think critically about whether there is any new information that warrants any action — Hint: almost always there is not — I am not really following this comparison.

To the best of my recollection, REITs in 2007 were not expected to outperform the broader market. Some non-correlation with the market was expected, but overall the risk/return profile was expected to be similar to that of the broader market. Higher dividend yields was a more common pitch. Also, the leverage associated with REITs had not been severely tested yet, and the exaggerated volatility that showed up in REITs in 2008/2009 due in large part to that leverage was not widely expected yet. In contrast, the article makes a case for higher expected returns and higher expected risk with EM.

Perhaps more importantly, the case for REITs in 2007 can be seen, in retrospect, as an example of recency bias and chasing returns through back-testing. In 2007, the REIT index had substantially outperformed the broader market over the preceding 10-year period, and REIT valuations were running high. In contrast, EM indexes today have substantially underperformed the broader markets over the past 10 years, and are recognized as having significantly lower valuations than the US and even developed international markets.

This is by no means a recommendation for any action. As interesting as the article is to peruse, the wisest course of action is to stay the course with an appropriate AA.
"Discipline matters more than allocation.” ─William Bernstein

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by hdas » Mon Oct 08, 2018 6:49 pm

the key figures are not what Mr. Larimore posted, since everybody has adjusts their biases with International allocation %, best to look at Total World allocations:

9.20% Emerging Markets
19.20% Europe
13.40% Pacific
0.20% Middle East
57.90% North America
0.10% Other

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by arcticpineapplecorp. » Mon Oct 08, 2018 7:10 pm

jhfenton wrote:
Mon Oct 08, 2018 8:53 am
Taylor Larimore wrote:
Mon Oct 08, 2018 8:31 am
Strive for simplicity (read link below).
Avoiding useless complexity makes sense. But for an asset class as volatile as emerging markets, I want to hold it separately. When it goes up 30% in a year, I want to rebalance out of it. When it drops 30% in a year, I want to rebalance into it.

I've held a separate emerging markets position since we made our first non-401(k) investments in the summer of 1998. The ups and downs have been dramatic to say the least, but they've done well for us, especially when you consider the impact of periodic investing and rebalancing.
But if the total international stock market index fund is 20% emerging markets and it tanks, then your new contributions (and/or rebalanceing from TSM) would buy you those EM stocks when they're on sale. The opposite would also be true.

And if the total international stock market index fund holds 20% EM, then when EM does poorly (assuming int. developed does better) then wouldn't the fund itself rebalance into EM to get the EM weight back to 20%?

Isn't this similar to any other fund that holds multiple asset classes? The total world rebalances, a 60/40 fund rebalances between stock and bond, a target date fund rebalances, toal stock market rebalances between large/small/mid and so on.

So what am I missing about rebalancing being different holding the funds separately than altogether?
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by MJW » Mon Oct 08, 2018 7:16 pm

arcticpineapplecorp. wrote:
Mon Oct 08, 2018 7:10 pm
And if the total international stock market index fund holds 20% EM, then when EM does poorly (assuming int. developed does better) then wouldn't the fund itself rebalance into EM to get the EM weight back to 20%?
Unless my understanding of index funds has been completely wrong for years now, Total International would simply drift to whatever the new market weight for EM would be. The composition of the fund is dependent on market weights, not a directive to hold certain segments of the fund at pre-determined allocations. The percentage of EM shown (and Europe, Pacific, etc.) reflects the current composition for investor reference; the fund itself is agnostic toward what it holds.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by nisiprius » Mon Oct 08, 2018 8:07 pm

Having read the article, I still do not understand whether Larry Swedroe is advocating overweighting emerging markets within one's international allocation, or whether he is simply advocating not excluding them--that is, not restricting yourself to an "international" index fund that invests only in developed markets, such as the DFA International Large-Cap Portfolio, DFALX.

That is, I do not understand whether he would suggest that an investor in the Vanguard Total International Stock Market Index Fund, which currently includes 17% emerging markets (by Morningstar's definition of "emerging markets,") ought to add an emerging markets fund, or whether 17% is enough.

In 2004, in his book The Only Guide To Winning Investment Strategy You'll Ever Need: Index Funds and Beyond--The Way Smart Money Creates Wealth Today, Revised Edition, he published a set of model portfolios. The "moderate" portfolio, 60% stocks, suggested 18% international stocks, allocated 3% to large, 6% to large value, 6% to small, and 3% to emerging markets.

These names line up well with the DFA funds DFALX, DFIVX, DFISX, and DFEMX. The first three are close to 100% developed markets. Thus, in his model portfolio, emerging markets represented 3/18 = 1/6 = 16% of the international allocation (assuming that the other three allocations are to developed markets only*). I'm not exactly sure, but in 2004 I think that would have been close to cap-weight, maybe a slight overweighting.
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Re: Larry Swedroe: Why Emerging Markets Matter

Post by arcticpineapplecorp. » Mon Oct 08, 2018 8:11 pm

MJW wrote:
Mon Oct 08, 2018 7:16 pm
arcticpineapplecorp. wrote:
Mon Oct 08, 2018 7:10 pm
And if the total international stock market index fund holds 20% EM, then when EM does poorly (assuming int. developed does better) then wouldn't the fund itself rebalance into EM to get the EM weight back to 20%?
Unless my understanding of index funds has been completely wrong for years now, Total International would simply drift to whatever the new market weight for EM would be. The composition of the fund is dependent on market weights, not a directive to hold certain segments of the fund at pre-determined allocations. The percentage of EM shown (and Europe, Pacific, etc.) reflects the current composition for investor reference; the fund itself is agnostic toward what it holds.
ok, true. but let's say for whatever reason everybody decided to hold more small caps (than present market), wouldn't that also change the composition of the total stock market index fund (and total global stock market fund as well)?

I guess what I'm asking is do you believe TSM is fine or do you split up large/small/mid as well into their discrete component parts? And if TSM is acceptable to you, that's market cap weighting just the same as TISM or Total Global Stock market index fund, etc. isn't it?
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Re: Larry Swedroe: Why Emerging Markets Matter

Post by MJW » Mon Oct 08, 2018 8:26 pm

arcticpineapplecorp. wrote:
Mon Oct 08, 2018 8:11 pm
ok, true. but let's say for whatever reason everybody decided to hold more small caps (than present market), wouldn't that also change the composition of the total stock market index fund (and total global stock market fund as well)?

I guess what I'm asking is do you believe TSM is fine or do you split up large/small/mid as well into their discrete component parts? And if TSM is acceptable to you, that's market cap weighting just the same as TISM or Total Global Stock market index fund, etc. isn't it?
It's a valid argument if you are content with holding stocks at their market weights. But you don't get a rebalancing bonus this way, as jhfenton argues you would if you held EM separately. I understand both arguments but don't have a strong conviction about either.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by gtwhitegold » Mon Oct 08, 2018 8:46 pm

Lower correlations with US equities and greater expected returns are why I personally am overweight EM relative to IDM in my IPS. If this actually benefits me in the long run is yet to be seen.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by reformed.trader » Mon Oct 08, 2018 8:53 pm

All 10y return forecasts I have seen, based on current valuations, have EM returning ~6% real whereas, US is ~1% real. Why in the world would I want to hold 4x more US than EM like I get in the total world stock market. As a result, I am heavily overweight EM(~50%) and heavily underweight US(~15%). I believe we are at extreme relative valuation differences.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by HEDGEFUNDIE » Mon Oct 08, 2018 9:04 pm

reformed.trader wrote:
Mon Oct 08, 2018 8:53 pm
All 10y return forecasts I have seen, based on current valuations, have EM returning ~6% real whereas, US is ~1% real. Why in the world would I want to hold 4x more US than EM like I get in the total world stock market.
Because the market can stay irrational longer than you can stay the course.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by Random Walker » Mon Oct 08, 2018 9:10 pm

Nisiprius,
As you know, I’m not Larry, but I think he’d say the starting point is world market cap weighting. The US/Int split is about 50/50. EM I think makes up 20-25% of Int. This would imply a good starting point is %EM = 10-12.5% of equities. That being said, I’m sure it’s more important to stick to whatever % you pick than to pick the “right” %. Morningstar lists DFA TA World Ex US as 18% EM.

Dave

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by Elysium » Mon Oct 08, 2018 9:11 pm

reformed.trader wrote:
Mon Oct 08, 2018 8:53 pm
All 10y return forecasts I have seen, based on current valuations, have EM returning ~6% real whereas, US is ~1% real. Why in the world would I want to hold 4x more US than EM like I get in the total world stock market. As a result, I am heavily overweight EM(~50%) and heavily underweight US(~15%). I believe we are at extreme relative valuation differences.
Only problem is, those forecasts have not materialized into actual results. Valuation can be cheaper and continue to remain cheap, and that is for a reason. Investors are willing to pay a premium for US corporations, many of them are actually more economically sound than some of the entire countries in the EM basket. You can bet, it's your money, if you have too much of it then wouldn't matter like Larry for instance has most of his safe money he needs in fixed income assets, so wouldn't matter to him one iota if his EM investments goes to zero.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by reformed.trader » Mon Oct 08, 2018 9:35 pm

Elysium wrote:
Mon Oct 08, 2018 9:11 pm
reformed.trader wrote:
Mon Oct 08, 2018 8:53 pm
All 10y return forecasts I have seen, based on current valuations, have EM returning ~6% real whereas, US is ~1% real. Why in the world would I want to hold 4x more US than EM like I get in the total world stock market. As a result, I am heavily overweight EM(~50%) and heavily underweight US(~15%). I believe we are at extreme relative valuation differences.
Only problem is, those forecasts have not materialized into actual results. Valuation can be cheaper and continue to remain cheap, and that is for a reason. Investors are willing to pay a premium for US corporations, many of them are actually more economically sound than some of the entire countries in the EM basket. You can bet, it's your money, if you have too much of it then wouldn't matter like Larry for instance has most of his safe money he needs in fixed income assets, so wouldn't matter to him one iota if his EM investments goes to zero.
Only increases future expected return. If you see something like an earnings ratio as an income stream, its far easier to buy-in to.

Valuations have shown to predict returns across time and asset classes. If you believe that somehow now is different, you are free to invest differently. I don't know why anyone would want to take that bet though.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by whodidntante » Mon Oct 08, 2018 9:52 pm

nisiprius wrote:
Mon Oct 08, 2018 8:07 pm
Having read the article, I still do not understand whether Larry Swedroe is advocating overweighting emerging markets within one's international allocation, or whether he is simply advocating not excluding them--that is, not restricting yourself to an "international" index fund that invests only in developed markets, such as the DFA International Large-Cap Portfolio, DFALX.
I already had my whiskey, but I believe he has posted being overweight in EM is reasonable, as long as you don't tilt too heavily. I forget what he posted as the limits of reason, maybe 25%. I don't know why I posted this; Google it I guess.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by Elysium » Mon Oct 08, 2018 10:13 pm

reformed.trader wrote:
Mon Oct 08, 2018 9:35 pm
Elysium wrote:
Mon Oct 08, 2018 9:11 pm
reformed.trader wrote:
Mon Oct 08, 2018 8:53 pm
All 10y return forecasts I have seen, based on current valuations, have EM returning ~6% real whereas, US is ~1% real. Why in the world would I want to hold 4x more US than EM like I get in the total world stock market. As a result, I am heavily overweight EM(~50%) and heavily underweight US(~15%). I believe we are at extreme relative valuation differences.
Only problem is, those forecasts have not materialized into actual results. Valuation can be cheaper and continue to remain cheap, and that is for a reason. Investors are willing to pay a premium for US corporations, many of them are actually more economically sound than some of the entire countries in the EM basket. You can bet, it's your money, if you have too much of it then wouldn't matter like Larry for instance has most of his safe money he needs in fixed income assets, so wouldn't matter to him one iota if his EM investments goes to zero.
Only increases future expected return. If you see something like an earnings ratio as an income stream, its far easier to buy-in to.

Valuations have shown to predict returns across time and asset classes. If you believe that somehow now is different, you are free to invest differently. I don't know why anyone would want to take that bet though.
It hasn't in the case of EM, except in sporadic bursts of outpeformance. As I have stated before, I am invested in EM for last 14 years, and continue to hold. However, I will not look at valuations and conclude this is a screaming buy, because I know from experience lower valuations do not result in excess returns with EM. If you have the evidence to show otherwise I am interested to see that.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by asif408 » Mon Oct 08, 2018 10:18 pm

Elysium wrote:
Mon Oct 08, 2018 9:11 pm
Only problem is, those forecasts have not materialized into actual results. Valuation can be cheaper and continue to remain cheap, and that is for a reason. Investors are willing to pay a premium for US corporations, many of them are actually more economically sound than some of the entire countries in the EM basket.
Only problem with your point is that it's only been 3-4 years since forecasts have been much more on the side of EM. Citing short-term underperformance as a justification to poo-poo valuation is a weak counterarguement since valuations rarely play out on a 3-4 year time horizon. If in 2023 we still see EM lagging then we can have a reasonable discussion about whether valuations are useless for asset allocation.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by Elysium » Mon Oct 08, 2018 11:07 pm

asif408 wrote:
Mon Oct 08, 2018 10:18 pm
Elysium wrote:
Mon Oct 08, 2018 9:11 pm
Only problem is, those forecasts have not materialized into actual results. Valuation can be cheaper and continue to remain cheap, and that is for a reason. Investors are willing to pay a premium for US corporations, many of them are actually more economically sound than some of the entire countries in the EM basket.
Only problem with your point is that it's only been 3-4 years since forecasts have been much more on the side of EM. Citing short-term underperformance as a justification to poo-poo valuation is a weak counterarguement since valuations rarely play out on a 3-4 year time horizon. If in 2023 we still see EM lagging then we can have a reasonable discussion about whether valuations are useless for asset allocation.
Between now and 2023, there will be an year when EM will outperform everything else. Does that prove anything, if it were to have a couple of sharp negative years after that. As I said before, the return distributions are highly volatile and highly unpredictable, and that makes it almost impossible to make any over / under weighting decisions based on valuations. I am not against anyone owning EM, as I am long on EM myself, it's the doubling down part and overweighting based on valuations that just doesn't make any sense.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by typical.investor » Mon Oct 08, 2018 11:17 pm

Random Walker wrote:
Mon Oct 08, 2018 9:10 pm
Nisiprius,
As you know, I’m not Larry, but I think he’d say the starting point is world market cap weighting. The US/Int split is about 50/50. EM I think makes up 20-25% of Int. This would imply a good starting point is %EM = 10-12.5% of equities. That being said, I’m sure it’s more important to stick to whatever % you pick than to pick the “right” %. Morningstar lists DFA TA World Ex US as 18% EM.

Dave
M* has Vanguard at 17% of international.
Vanguard says they are 20%

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by fennewaldaj » Mon Oct 08, 2018 11:26 pm

typical.investor wrote:
Mon Oct 08, 2018 11:17 pm
Random Walker wrote:
Mon Oct 08, 2018 9:10 pm
Nisiprius,
As you know, I’m not Larry, but I think he’d say the starting point is world market cap weighting. The US/Int split is about 50/50. EM I think makes up 20-25% of Int. This would imply a good starting point is %EM = 10-12.5% of equities. That being said, I’m sure it’s more important to stick to whatever % you pick than to pick the “right” %. Morningstar lists DFA TA World Ex US as 18% EM.

Dave
M* has Vanguard at 17% of international.
Vanguard says they are 20%
Yeah morningstar considers both Korea and Taiwan as developed. Vanguard considers Korea developed. Many others consider neither Taiwan or Korea developed. So depending on those two you get a range of like 17-24%

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by jalbert » Tue Oct 09, 2018 2:45 am

EM “outperformance”:

https://www.portfoliovisualizer.com/bac ... arket2=100

EM started being an investable asset class in the early 1990’s. Barclays Global Investors (formerly Wells Fargo Investment Advisors and subsequently iShares) started EM investing for institutional clients in 1992. In those days only 4 or 5 EM countries had enough liquidity to be considered fully investable markets. Argentina was the largest and was dropped from EM status after a currency crisis several years later sent a substantial fraction of its market cap to zero.

The earliest data readily available to individual investors dates from 94/95. The start of VEIEX in May 1994 is very close to the beginning of the asset class and does not exclude outperformance.
Last edited by jalbert on Tue Oct 09, 2018 3:05 am, edited 3 times in total.
Risk is not a guarantor of return.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by typical.investor » Tue Oct 09, 2018 2:55 am

jalbert wrote:
Tue Oct 09, 2018 2:45 am
EM “outperformance”:

https://www.portfoliovisualizer.com/bac ... arket2=100

Best returns with lowest stdev since 95 is 100 US.

https://www.portfoliovisualizer.com/eff ... eight2=100

Larry was looking from ‘88 though.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by jalbert » Tue Oct 09, 2018 3:04 am

The EM index return was not available to investors in 1988 and I think there is survivorship bias in the index return from Argentine equities being dropped from the index. I’m skeptical that investors would have been able to liquidate the position at the valuation used when they were dropped from the index.
Risk is not a guarantor of return.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by afan » Tue Oct 09, 2018 5:03 am

jalbert wrote:
Tue Oct 09, 2018 2:45 am
EM “outperformance”:

https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=2&startYear=1972&endYear=2018&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&portfolio1=Custom&portfolio2=Custom&portfolio3=Custom&TotalStockMarket1=100&EmergingMarket2=100

EM started being an investable asset class in the early 1990’s. Barclays Global Investors (formerly Wells Fargo Investment Advisors and subsequently iShares) started EM investing for institutional clients in 1992. In those days only 4 or 5 EM countries had enough liquidity to be considered fully investable markets. Argentina was the largest and was dropped from EM status after a currency crisis several years later sent a substantial fraction of its market cap to zero.

The earliest data readily available to individual investors dates from 94/95. The start of VEIEX in May 1994 is very close to the beginning of the asset class and does not exclude outperformance.
Jalbert,

You are spoiling the party by bringing up facts.

EM is GREAT! Buy EM! Pay no attention to that man behind the curtain.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by typical.investor » Tue Oct 09, 2018 5:30 am

jalbert wrote:
Tue Oct 09, 2018 3:04 am
The EM index return was not available to investors in 1988 and I think there is survivorship bias in the index return from Argentine equities being dropped from the index. I’m skeptical that investors would have been able to liquidate the position at the valuation used when they were dropped from the index.
I see. Well let's just throw this in the international is lousy bin.

1995-2018 CAGR:
10.18% US
6.11% EM
5.02% Intl Developed ex-US

In any case, portfolio visualizer also shows EM and US were last tied July 31, 2011 [1995 -7.31 2011 was a tie]. At that time, the USD index was 83.4. It's now 101. The average from '95 until now is 94.7. The average since '73 is 95.8. It was around 89 in '95 so the US has been strengthening in that time and is now higher than it's long term average.***

The USD strength reinforces the decision to hold US equities. A good quote I read on the effect of USD movement stated:
The point of all this is that the negative correlation between foreign equities and the dollar is, to borrow Matt Levine's phrase, 'a feature, not a bug,' as it makes foreign equities great portfolio diversifiers. As such, investors should be prepared to understand that extended periods of underperformance are likely in a world of floating exchange rates as currencies have cycles of strength and weakness all their own. It should also be considered that, in the years since the financial crisis, the effect of unprecedented central bank policies on global currencies may have affected the duration and depth of currency cycles, and therefore also the relative performance of US and foreign equities, so investing abroad may require more discipline and patience than it required previously.
You can argue that a strong USD doesn't impact GDP growth (that US equities are priced for) but I don't think the St. Louis Fed is going to agree with you. In any case, I believe currency is cyclical and it has an economic impact. So that's why I don't go 100% US.

If the argument is one shouldn't hold EM, then I guess that's true for international in general.

Higher US interest rates can attract inflows for a while and boost the USD, but let's see what happens with inflation and how much tariffs have an effect.

Inflation, tariffs are hitting consumers at the cash register -- https://www.cbsnews.com/news/inflation- ... -register/
Last edited by typical.investor on Tue Oct 09, 2018 5:56 am, edited 1 time in total.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by HomerJ » Tue Oct 09, 2018 5:51 am

asif408 wrote:
Mon Oct 08, 2018 10:18 pm
Elysium wrote:
Mon Oct 08, 2018 9:11 pm
Only problem is, those forecasts have not materialized into actual results. Valuation can be cheaper and continue to remain cheap, and that is for a reason. Investors are willing to pay a premium for US corporations, many of them are actually more economically sound than some of the entire countries in the EM basket.
Only problem with your point is that it's only been 3-4 years since forecasts have been much more on the side of EM. Citing short-term underperformance as a justification to poo-poo valuation is a weak counterarguement since valuations rarely play out on a 3-4 year time horizon. If in 2023 we still see EM lagging then we can have a reasonable discussion about whether valuations are useless for asset allocation.
I happen to have Vanguard Emerging Markets in an old Roth IRA that has never been touched or added to since March of 2010. Over 8.5 years, it's up a grand total of 28% nominal or about 3% a year. That includes reinvested dividends.

36-month trailing P/E (I found a chart from Vanguard in 2013) were in the low teens in March 2010 for Emerging Markets, while in the low 20s for the U.S. in March 2010.

https://personal.vanguard.com/pdf/s813.pdf

No idea why the chart in this paper uses 36-month trailing P/E instead of CAPE. Chart is on page 13.

Valuations looked to favor EM over the U.S. 8 years ago.

The problem with EM is currency issues, and political instability. It's not JUST about valuations.

Hard to find data on EM historical valuations from web-sites I trust.
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Re: Larry Swedroe: Why Emerging Markets Matter

Post by HEDGEFUNDIE » Tue Oct 09, 2018 6:00 am

“Investors can buy on the dip, but emerging markets are in 'structural decline': Barclays”

https://www.cnbc.com/2018/10/09/emergin ... clays.html

The value chain argument is one that would give me pause in overweighting EM. Basically the argument is that in the past there was a well-trod path for poor countries to get rich, one that relied upon exporting to rich countries. Lots of reasons to believe that model is fundamentally broken now.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by asif408 » Tue Oct 09, 2018 6:19 am

Elysium wrote:
Mon Oct 08, 2018 11:07 pm
Between now and 2023, there will be an year when EM will outperform everything else. Does that prove anything, if it were to have a couple of sharp negative years after that. As I said before, the return distributions are highly volatile and highly unpredictable, and that makes it almost impossible to make any over / under weighting decisions based on valuations. I am not against anyone owning EM, as I am long on EM myself, it's the doubling down part and overweighting based on valuations that just doesn't make any sense.
I think it would prove something, that if you pay a higher price for one investment vs another that you generally should expect a lower return in the medium to long term for the investment you pay more for. I would agree there is some level of unpredictability, particularly with the path and the exact length of time it takes to unfold, but when valuation disparities are high between equities classes the odds favor the lower priced asset class providing a higher return eventually. If you only have a few years to invest valuation is probably not very useful, and it is always possible the outperformance doesn't come.

And, as you say, once EM outperforms and its valuations converge or exceed the US, forward returns should be more favorable for the US, and EM will probably have some sharp negative years at that point.

I actually don't disagree with your last point based on your previous statement. Unfortunately, I see lots of people here doing the opposite recently (under weighting EM and developed international stocks), based on a whole host of reasons, most of which do not center around valuation and center around recent performance, perceived safety of US vs overseas markets, etc. I don't have a problem with folks like yourself who don't want to use valuation if you prefer a static allocation, but it appears many people can't resist under weighting international stocks based on its last few years of performance of using the start of international funds, which just happened to start with a major US bull marketsand at the current time at the tail end of a US bull market.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by Augustus » Tue Oct 09, 2018 6:28 am

I've been holding off on buying into EM for now, in part because I don't think we've hit rock bottom just yet. I think a lot of investors also chase diversification for its own sake, even if it takes them into some worse-performing asset classes.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by Elysium » Tue Oct 09, 2018 7:20 am

Duplicate
Last edited by Elysium on Tue Oct 09, 2018 7:23 am, edited 1 time in total.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by Elysium » Tue Oct 09, 2018 7:23 am

None of this is new. Back in the days of the old Morningstar forums, Larry used to site the same arguments, and at that time nearly no one used to own EM. While Larry has been consistent about why one should own them, I cannot say the same thing about everyone else's interest in this. People sort of warmed up to the idea post 2003 when EM went on a tear for a few years until the eventual 2008 crash. I got in around 2004, and enjoyed the ride up to 2007, and then continued holding just because I have made so much gains already.

EM used to be lousy investment prior to 2003. In fact if you swith the end period to 2002, it had negative returns since it's existence. Not something you'd want to double down on.

See here: https://www.portfoliovisualizer.com/bac ... arket2=100

Short burst of outperformance from 2003 onwards: https://www.portfoliovisualizer.com/bac ... arket2=100

But EM returned to being a lousy investment again after 2009: https://www.portfoliovisualizer.com/bac ... arket2=100

As I said before, the distribution is highly erratic, and not based on valuations alone, or any macroeconomic fundamentals you can put down. There is a lot of speculative aspect to the EM return distributions. You just have to wonder when investors will feel good about them. As of now, Wall Street is keen on selling the idea to the general public, howevver, I think there are significant headwinds to overcome. Then again, who knows, since this is such a speculative investment.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by asif408 » Tue Oct 09, 2018 8:27 am

HomerJ wrote:
Tue Oct 09, 2018 5:51 am
I happen to have Vanguard Emerging Markets in an old Roth IRA that has never been touched or added to since March of 2010. Over 8.5 years, it's up a grand total of 28% nominal or about 3% a year. That includes reinvested dividends.

36-month trailing P/E (I found a chart from Vanguard in 2013) were in the low teens in March 2010 for Emerging Markets, while in the low 20s for the U.S. in March 2010.

https://personal.vanguard.com/pdf/s813.pdf

No idea why the chart in this paper uses 36-month trailing P/E instead of CAPE. Chart is on page 13.

Valuations looked to favor EM over the U.S. 8 years ago.

The problem with EM is currency issues, and political instability. It's not JUST about valuations.

Hard to find data on EM historical valuations from web-sites I trust.
Well, if you trust this one, it said valuations (using CAPE) were at least as high or higher in EM from 2006-2012: https://goo.gl/images/kQJ1D3. If you started investing in EM during that time frame, you've done poorly since then. It's only been since 2014 or 2015 that valuations have diverged in favor of EM. They were also much higher for EM in the early 1990s, which preceded a near decade of poor performance for EM.

Sure, political instability and currency are issues, but they almost always are, that hasn't changed. Valuations have.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by Random Walker » Tue Oct 09, 2018 8:41 am

For the reasons I mentioned above DFA and Larry’s firm, BAM, recommend combining EM as much as possible into a total market or core fund, then adding extra EM to taste. I couldn’t help myself, and had to add a touch of EMV.

Dave

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by Random Walker » Tue Oct 09, 2018 9:00 am

It’s interesting, the whole value / growth thing plays out at the country level too. Jeremy Siegel wrote a book called The Future For Investors, where he shows that if anything there is a negative relationship between a country’s GDP growth and returns to its stock markets. Seems whether it’s an individual stock, an index, or a whole country people tend to over pay for growth.

Dave

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by nisiprius » Tue Oct 09, 2018 9:20 am

Elysium wrote:
Tue Oct 09, 2018 7:23 am
...As I said before, the distribution is highly erratic, and not based on valuations alone, or any macroeconomic fundamentals you can put down...
This is true of virtually every stock-based investment, and I mean this sincerely when I say I don't know how to look at this rationally. Virtually all outperformers, be they asset classes or portfolio strategies or plain old actively managed funds, achieve that outperformance in relatively short, intense bursts. One thing that it does mean is that "compounding" arguments--imagine what this extra 0.92% boost in CAGR will compound to in thirty years--are misleading, because portfolios that have shown superior performance in the past almost never show it in the form of continuous, steady, year-by-year outperformance. Traditional factor portfolios, e.g. the Bill Schultheis Coffeehouse, or the sample portfolios Larry published, were put down in black and white with percentages and sometimes actual ticker symbols in 1998, and indeed have shown worthwhile outperformance since then--but most of it is attributable to 2000-2002. Since then, it has been reasonably fair to say they have shown neither outperformance or underperformance, so it's been pure gain. (Gain which I haven't participated in personally, by the way, so that isn't a brag).

But the question is: do Coffeehouse or other "traditional 1990's-style Fama-French three-factor slice-and-dice investors" think in terms of "I'm going to hold to this steadfastly for another twenty or thirty years, in the belief that I might well catch another 2000-2002... or, then again, of course, might not?" Is the claimed superiority phrased in terms of "chance of catching another shining moment?"

(One of the few examples of something that really did outperform continuously was the Legg Mason Value Trust under Bill Miller, which beat the S&P 500 every single year consecutively for fifteen years in a row--only to lose back every penny of outperformance in about three years. Of course, the number of dollars that went into the fund during its seemingly "permanently high plateau" was far larger than the amount that went in early enough--you had to get in well before it became famous in order to still be ahead of the S&P 500 after 2008-2009--so it was overall, a great engine of wealth destruction).

Of course, reading Mandelbrot and Hudson's The Misbehavior of Markets: A Fractal View of Financial Turbulence was a big "Aha!" moment for me, and I've believed very little of anything from financial "experts" since then. It's the elephant in the room. Nobody seriously attacks it, everybody just pretends it's not there, because it pretty well blows up all attempts to predict the future, even statistically, from the past--and despite claimed efforts in later chapters, does not seriously put up anything else in its place.
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Re: Larry Swedroe: Why Emerging Markets Matter

Post by nisiprius » Tue Oct 09, 2018 9:23 am

Random Walker wrote:
Tue Oct 09, 2018 8:41 am
For the reasons I mentioned above DFA and Larry’s firm, BAM, recommend combining EM as much as possible into a total market or core fund...

Dave
Which DFA fund is that? The three DFA international funds that seem to be indicated by Larry Swedroe's 2005 model portfolio are all developed markets only. How would one follow his model portfolio and invest in international large-cap, large value, and small, using DFA funds, and get emerging markets at market cap without adding a fourth fund?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Larry Swedroe: Why Emerging Markets Matter

Post by nedsaid » Tue Oct 09, 2018 9:54 am

gtwhitegold wrote:
Mon Oct 08, 2018 8:46 pm
Lower correlations with US equities and greater expected returns are why I personally am overweight EM relative to IDM in my IPS. If this actually benefits me in the long run is yet to be seen.
This is why I made the comment that Emerging Markets are the new REITs. I remember seeing data back in 2007 that REITs had a bit higher returns than the S&P 500 with low correlation. The perfect diversifier. Wonder how long before the academics sour on Emerging Markets just as they seemingly have soured on REITs. Hope this isn't flavor of the month.
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Re: Larry Swedroe: Why Emerging Markets Matter

Post by Valuethinker » Tue Oct 09, 2018 9:56 am

nisiprius wrote:
Tue Oct 09, 2018 9:20 am

Of course, reading Mandelbrot and Hudson's The Misbehavior of Markets: A Fractal View of Financial Turbulence was a big "Aha!" moment for me, and I've believed very little of anything from financial "experts" since then. It's the elephant in the room. Nobody seriously attacks it, everybody just pretends it's not there, because it pretty well blows up all attempts to predict the future, even statistically, from the past--and despite claimed efforts in later chapters, does not seriously put up anything else in its place.
It always reassures me, given I have more formal training in finance than you, Nisiprius, that you feel that way about it.

Because for me, too, it was "aha". So much so that I sent a copy to my first boss, who was by then responsible for a something like $30 billion portfolio (and had a Phd in macroeconomics), many years after I had last been in touch with him.

The world, and in particular the financial world, is subject to far greater chance than we assume.

I think this is also the main message of Nicholas Taleb's works. He saw the Lebanese civil war first hand where the "Paris of the Orient" got turned into a bloody wasteland (I still remember the bitter pitched battles around the Beirut Holiday Inn - sort of like the Red Tractor Factory in Stalingrad in 1942). I think that gives him an emotional understanding that lets him see discontinuous change.

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