How much allocation to Emerging Markets is too much?

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erikrief
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How much allocation to Emerging Markets is too much?

Post by erikrief » Thu Mar 17, 2011 11:23 am

Ive been looking around everywhere and i cant seem to find a coherent and valid answer to my question. Everyone usually recomends that you invest a portion of your assets in EM, ranging from 10% - 30%. The thing is that Im 25, so i have at least about 40 more years to go before i need to touch my investments in the worst of cases and because of this i have a feeling of complete imunity to volatility. In fact, ive been reading the Boglehead theory so much that in a wierd way im kind of exited when the market goes down and i happen to have extra cash on hand to rebalance. Ok so the question is: Why wouldnt i want to make Emerging Markets 80% of my portfolio, or even more. My time horizon is very long and if i lost 90% of my investment tomorrow it would not really affect me I have a very very long time to make it up. With time i would balance out to a more conservative portfolio but that would not happen in a very long time.
My portfolio rightnow is this but i think its just way to conservative:

US Large Cap 5%
US Large Cap Value 8.5%
US Small Cap 10%
US Small Cap Value 16%
US REITs 3%

Large Cap International Developed 9%
Small Cap Int Developed 11%
Small Cap Int Developed Value 12%

Emerging Large 14%
Emerging Small 9%
Foreign REITs 3%

The Wizard
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Post by The Wizard » Thu Mar 17, 2011 11:32 am

Emerging Markets are all outside the US.
Most investors like to have some percentage in our domestic stock market as well.
That being said, I don't think you'll go broke putting 80% in EM. Go with it and report back every so often on how it's going. VEIEX/VEMAX would be a good choice...

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Post by fundtalker123 » Thu Mar 17, 2011 11:40 am

Suppose you could peek into the future and find out that the "emerging" markets mostly failed to emerge, would you still want to overweight it.

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Post by minesweep » Thu Mar 17, 2011 11:41 am


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Post by nimo956 » Thu Mar 17, 2011 11:42 am

Why are you so certain that you will automatically come out ahead in 40 years? That's not a given, and you aren't immune to the risks inherent in Emerging Markets. It's easy to say that you don't care if you lose 90% of your portfolio, but it's a different thing completely to experience it. Note that a 90% loss requires gains of 900% just to get back to where you were originally!

$100 * 0.1 = $10
$10 * (1 + 9) = $100
Last edited by nimo956 on Thu Mar 17, 2011 11:45 am, edited 1 time in total.
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Post by lmpmd » Thu Mar 17, 2011 11:44 am

Look at what those TR funds at VG have in EM's. The people who put them together are trained experts!

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Post by Manbaerpig » Thu Mar 17, 2011 11:46 am

It's all about covering your bets, if you want to get paid on most rolls of the wheel you've got to cover more of the table, if you picture an imaginary table that is actually rigged in your favor instead of the reverse

sure a single bed on 35 red will pay 80:1, and a single lottery ticket can pay 100m:1, but you have to look at the probabilities with the greatest likelihood of you getting paid

the conventional wisdom here is that the solution there is to play the field, not haitian penny stocks or whatever segment appears to have the biggest upside (eg putting it all on 35 red)

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Post by yobria » Thu Mar 17, 2011 11:48 am

When you're 25, it makes no difference what you do, since you have so little savings.

When you're say, 50, the idea of stuffing an envelope with 80% of your net worth and sending off to China, Russia, etc. would be a foolish failure to diversify.

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Re: How much allocation to Emerging Markets is too much?

Post by livesoft » Thu Mar 17, 2011 11:52 am

erikrief wrote:Ive been looking around everywhere and i cant seem to find a coherent and valid answer to my question. Everyone usually recomends that you invest a portion of your assets in EM, ranging from 10% - 30%.
Really? Who is this "everyone"? Can you provide 3 links from credentialed people that I can read that suggest this?

EM is about 20% to 25% of foreign markets. If you want the market weight for EM, then you want 20% to 25% of your foreign equities to come from EM countries. So if you have 20% of your portfolio in foreign equities, then 4% to 5% in EM would be the market weight for that allocation of foreign equities.

You want to own EM when it bottoms out and is only going up in the future. You don't want to own EM when it tops out and is only going down in the future. Oh, no one can predict the future.
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Post by kenyan » Thu Mar 17, 2011 11:55 am

Right...losing 90% of your accounts tomorrow may not be that big of a deal. What about losing 90% of them in 10 years, when your balance is several times higher? What about in 20 years?

Chances are, you'll be fine if you overweight EM, and I think there's no problem with investing aggressively when you're young if you have the risk tolerance. I used to be 50% EM, and I did hold on fine in 2008-2009, but my accounts were in the low 5 digits. Would I want that risk when I've got, say, half a million? If you do this, you need a definite plan for going conservative over time, or you may be tempted to do so during downturns.

In any case, you'd probably get a lot out of reading the linked thread.

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Post by Pacal » Thu Mar 17, 2011 12:05 pm

I have a 30+ year retirement horizon and I invest 30 % in Vanguard's emerging markets ETF (VWO) and 20 % in Vanguard's ex-US small-cap ETF (VSS), which holds 22 % in emerging markets.

I realize that this is definitely risky, but I'm comfortable with it at this point in my retirement horizon. I will gradually lower these percentages over the years.

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Post by rai » Thu Mar 17, 2011 12:09 pm

You can not know that you will work for 40 more years.

Read this book called "The Jungle" by Upton Sinclair.

The main character (Jurgis) was the most strong and hardest worker you could think of. He went to find a job and he was picked at first sight even tho others had been looking for work for weeks on end. There was no job too hard for Jurgis and he could work the longest hours without even feeling it.

But couple of things happened, sometimes the work went away meaning they didn't need him as much, next he got injured and they didn't need him like they used to because there were young strong workers to take his place.


The point is, you may like to believe you have 40 years to work, but it may not all come down as you plan.
Last edited by rai on Thu Mar 17, 2011 12:23 pm, edited 1 time in total.
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erikrief
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Post by erikrief » Thu Mar 17, 2011 12:22 pm

First of all Im amazed at the quickness of all of your responses. I thought this would move much more slowly jaja. Thanks to everyone for your feedback.
I agree with what all of you are saying. My account right now is in the low 5 digits. I would most certainly not have the same attitude if it was half a million. But if i ever want to get there im thinking i have to make good use of my long time horizon and the EM betas which come from this same volatility.
Now this point about losing 90% and having to gain 900% to get where you were before is in my opinion something that sound mathematically speaking pretty terrible but in reality it plays out less drastically i think. I dont think there is any event which could fundamentally destroy 90% of the value of every company in all the emerging markets execpt maybe a nuclear war between China Russia India Israel Korea and well, you see where im getting at.
Another valid point is that EM could in theory fail, but at the risk of going against the principles of Index Investing, I find this very very hard to believe. And again an event of this magnitude would most certainly have a huge impact on the developed markets as well. I guess you could say that maybe this was my one big bet. Of course based on the solid bases of the CAPM model and risk vs reward. I also believe that when we talk about emerging markets we are talking about a very very well diversified asset class.
Im kind of playing devils advocate here because I will probably not go 80% emerging markets but i want to understand why i did not do it.

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Post by erikrief » Thu Mar 17, 2011 12:34 pm

I would also like to add that im quite new at this so if im saying anything to ridicoulus have a little patience with me. This is a conversation which i wanted to have with someone and I really didnt know where to go to since index investing is not the most popular way to invest.

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Post by The Wizard » Thu Mar 17, 2011 12:39 pm

erikrief wrote:...since index investing is not the most popular way to invest.

Says who???

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Re: How much allocation to Emerging Markets is too much?

Post by nisiprius » Thu Mar 17, 2011 12:43 pm

erikrief wrote:Everyone usually recommends that you invest a portion of your assets in EM, ranging from 10% - 30%.
1) I don't think this is true.

2) Have people always been saying this, or have they only been saying it since 2003 or so? It might be interesting to look back and see who was recommending 10%-30% in EM before 2003. That is, is the allocation to emerging markets based on some kind of stable and coherent investing theory, or is it based EM was going gangbusters from 2003 to 2008? Prudent diversification, or flavor du jour?
Last edited by nisiprius on Thu Mar 17, 2011 12:49 pm, edited 1 time in total.
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Post by Stonebr » Thu Mar 17, 2011 12:49 pm

A few observations:

1. In the early years of investing, the savings rate is a bigger factor in accumulating wealth than the rate of return.
2. Tolerating a 90% drop is easier said than done.
3. EM has been driven by a once-in-a-lifetime emergence of a handful of giants -- Brazil, Russia, India, and China. This may not repeat or continue when Uganda, Bolivia, Vietnam, and Bangladesh are the key drivers.
4. In the words of soul singer Barry White, "Too much of anything is not good for you, baby."
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Post by kenyan » Thu Mar 17, 2011 12:59 pm

It's certainly up to you to define how much is "too much," but you currently have:

26% Small Cap Domestic
23% Small Cap International
23% EM-specific
3% Foreign REIT

= 75% highly risky assets, and 0% bonds/cash.

I just don't see how you can classify that portfolio as "way too conservative" for any investor in any situation. It may be ok for your situation, but conservative? No.

You state that you get excited when the market goes down and you happen to have extra cash on hand to rebalance. If you're all in risky assets, where are you going to get that cash to rebalance from?

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Post by Random Walker » Thu Mar 17, 2011 1:02 pm

I think I've heard that EM now comprises about 25% of international.

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Post by fluffyistaken » Thu Mar 17, 2011 1:06 pm

As others said, how you invest now is virtually irrelevant relative to how much you save. So if you feel like going 100% EM, go for it (just keep in mind that you wouldn't be exactly buying low).

Watching your $10,000 portfolio plunge while saving $2,000/month to buy more == :D
Watching your $1,000,000 portfolio plunge while saving $2,000/month to buy more == :cry:

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Re: How much allocation to Emerging Markets is too much?

Post by YDNAL » Thu Mar 17, 2011 1:07 pm

erikrief wrote:How much allocation to Emerging Markets is too much?

Anything above 15% of Large Cap Equities (total) - which is the Global market weight currently.

Anything above 22% of Mid-Small Cap Equities (total) - which is the Global market weight currently.
Last edited by YDNAL on Thu Mar 17, 2011 1:10 pm, edited 1 time in total.
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Post by The Wizard » Thu Mar 17, 2011 1:09 pm

Random Walker wrote:I think I've heard that EM now comprises about 25% of international.

Correct.
https://personal.vanguard.com/us/funds/ ... IntExt=INT

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Re: How much allocation to Emerging Markets is too much?

Post by YDNAL » Thu Mar 17, 2011 1:11 pm

The Wizard wrote:
Random Walker wrote:I think I've heard that EM now comprises about 25% of international.

Correct.
https://personal.vanguard.com/us/funds/ ... IntExt=INT

See previous post.
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Re: How much allocation to Emerging Markets is too much?

Post by Tramper Al » Thu Mar 17, 2011 1:14 pm

YDNAL wrote:
erikrief wrote:How much allocation to Emerging Markets is too much?

Anything above 15% of Large Cap Equities (total) - which is the Global market weight currently.

Anything above 22% of Mid-Small Cap Equities (total) - which is the Global market weight currently.

Wait, so the answer is that anything over market weight is too much? Is that the case at any age, and for any asset class? Or does this only apply to EM at age 25?

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Post by dwoten » Thu Mar 17, 2011 1:22 pm

The key to me is that the price is already set based on expectations like yours. The risk is not growth in those markets, but growth that does not exceed these expectations.

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Post by mcrunyan » Thu Mar 17, 2011 1:39 pm

I asked a very similar question a month or two ago (minesweep already linked to the discussion above). A number of people posted very good articles on EM in that thread. Perhaps the most persuasive argument against taking a huge position in EM, for me at least, was that EM has had an awesome run and that gain has already been priced into it. I read an article that compared the growth of EM before it became easily investable to after it became investable and it's not the same index it once was. Like Taylor says, past performance is not a guarantee of future results. (I thought it was a glib comment at the time but now realize he was right.) If you really want to take some risk then you might look to frontier markets, but they too are difficult to invest in. For what it's worth, we ended up putting 10% into EM and 10% into Int Sm Cap, which I think many on this board would still say is too risky.

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Re: How much allocation to Emerging Markets is too much?

Post by tetractys » Thu Mar 17, 2011 2:04 pm

erikrief wrote:My portfolio rightnow is this but i think its just way to conservative:

US Large Cap 5%
US Large Cap Value 8.5%
US Small Cap 10%
US Small Cap Value 16%
US REITs 3%

Large Cap International Developed 9%
Small Cap Int Developed 11%
Small Cap Int Developed Value 12%

Emerging Large 14%
Emerging Small 9%
Foreign REITs 3%

erikrief,

A few things:

This is a very aggressive portfolio, not conservative. Chances are that with an allocation to bonds of at least 20%, you will get better returns with less volatility after rebalancing. For information on how this is possible, read books encompassing modern portfolio theory, like those written by Ferri, Swedroe, Swensen, and Bernstein. They will also cover your questions on emerging markets. Bogle is also good to read on general investing; but he overlooks MPT.

Work from a core. First start with your allocation to international and domestic stocks, and bonds. Many people only do that, finding that the simplicity and returns from three total market funds are just fine. Branch out from there.

There's no need to use tiny percentage differences of less than 5%. For one thing, holdings of less than 5% will not make enough of a difference one way or another to matter. For another 5 or 10% increments between holdings are plenty accurate to capture any expected returns in an unknown future.

So there's a lot you can do to move from 11 funds that aren't accomplishing too much to less funds that accomplish a lot more.

Best regards, Tet
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Post by Random Walker » Thu Mar 17, 2011 2:16 pm

I posted that EM is 25% international. Didn't post that to indicate that that is the only correct allocation. But it isn't a bad starting point. Reasonable approach might be to use that as starting point and only deviate from it if one has a good reason. The specific % not as important as sticking to the chosen number. I think I've read that int small value is actually a better diversifier than EM.

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Post by lmpmd » Thu Mar 17, 2011 2:21 pm

Listen to merriman's podcast on these EM funds. He talks about the large difference in the money weighted vs the time weighted return in these funds. It's very eye-opening. It means that people (not you of course) get in and out of these at the wrong times. It's human nature.

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Post by White Coat Investor » Thu Mar 17, 2011 2:29 pm

I hold something like 8% (of total portfolio). When I first set that allocation that was far more than most were recommending. Not sure what to make of that. The world changes, sometimes its a bubble, sometimes it isn't.
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Post by fundtalker123 » Thu Mar 17, 2011 3:08 pm

Here's a question: who defines what "emerging markets" in such a fund are and what is the definition?

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Re: How much allocation to Emerging Markets is too much?

Post by YDNAL » Thu Mar 17, 2011 3:28 pm

Tramper Al wrote:
YDNAL wrote:
erikrief wrote:How much allocation to Emerging Markets is too much?

Anything above 15% of Large Cap Equities (total) - which is the Global market weight currently.

Anything above 22% of Mid-Small Cap Equities (total) - which is the Global market weight currently.

Wait, so the answer is that anything over market weight is too much? Is that the case at any age, and for any asset class? Or does this only apply to EM at age 25?

Maybe.
Maybe.
Maybe.

Putting the reins on a young bronco looking for 100% EM is always a good idea, though!
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Post by Noobvestor » Thu Mar 17, 2011 3:30 pm

I feel comfortable with 25% EM that I currently hold, though frankly, I'd feel comfortable still with more than that - perhaps up to 35-40% depending on circumstances. That said, recency bias warning: careful of being too bedazzled by recent growth ;) Edit: I also wouldn't go even to 25% without having a higher-than-average allocation to bonds. To go to 35-40% I would want to be Age+10 or Age+20 in bonds.
Last edited by Noobvestor on Thu Mar 17, 2011 3:37 pm, edited 1 time in total.
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Post by empb » Thu Mar 17, 2011 3:36 pm

If I were to guess, I'd say 9/10 of this forum's insistence on overweighting EM is some cocktail of recency bias and performance chasing.

I'd rather stick with market weights and make my best effort to target small and value stocks globally than relying on political risk to juice my returns.

Naturally, many people will feel differently.

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Post by Noobvestor » Thu Mar 17, 2011 3:38 pm

empb wrote:If I were to guess, I'd say 9/10 of this forum's insistence on overweighting EM is some cocktail of recency bias and performance chasing.

I'd stick with market weights and make my best effort to target small and value stocks globally than relying on political risk to juice my returns.

Naturally, many people will feel differently.


Could be. I've thought about that a lot, and second-guessed myself, but still overweight EM compared to market cap weightings. At the end of the day, as long as I stay the course it's actually *good* for me as a young accumulator to start buying into something that may well underperform for a while before taking off again.
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Post by crew » Thu Mar 17, 2011 9:53 pm

In 2005, in David Swensen's Unconventional Success, he recommended that long-term portfolios (30+ year time horizon) should have 5% emerging markets.

A few years later he raised that from 5% to 10%. He reduced the allocation to US Real Estate by 5%.

In 2005
US Equity - 30%
Foreign Developed Equity (MSCI index) - 15%
Emerging Markets (non-MSCI index) - 5%
US real Estate - 20%
TIPS - 15%
Long Treasury Bonds - 15%

In 2008 or 2009
The same, except Emerging markets are now 10% and US Real Estate is 15%.

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Re: How much allocation to Emerging Markets is too much?

Post by fredflinstone » Thu Mar 17, 2011 10:08 pm

in the thread linked above by minesweep, someone said that performance data for emerging markets exists only back to 1988. As I noted in that thread, I think it would be a mistake to assume, based on data from the last 23 years, that emerging markets will continue to outperform developed markets.

The desire to overweight EM, which we are seeing here and there on this Forum, is looking more and more like recency bias.

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Post by rob » Thu Mar 17, 2011 11:04 pm

I dunno... I run 7.5 (of total port not just equity) + another 2.5% that is a crossover with international.....

Never gave it a thought when I picked that about a decade and a half ago..... but recently with the vast run-up..... and when I see the $ value.... well.... I guess we all should have some portion of the portfolio that scares us otherwise everything is moving together :-)
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Post by Pacal » Thu Mar 17, 2011 11:11 pm

Performance chasing and recency bias are not behind my EM allocation noted above (30+ %). China, the most represented country in my EM fund (VWO), is clearly on its way to becoming the next superpower. India, the seventh most represented country in my EM fund, could also possibly achieve superpower status during my lifetime. Because of this personal outlook on the future economic landscape, I'm simply trying to tap into the potential rewards of investing in those up and coming economic juggernauts, among others. Furthermore, emerging markets are by nature where the greatest future growth is expected to occur.

Will I end up being correct with my outlook of the future economic landscape? I have absolutely no idea. But I don't think anyone else really does either. I stress that this is MY outlook, which has absolutely no qualifications behind it. But going with hunches is part, albeit a very small part, of investing.

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Post by Noobvestor » Thu Mar 17, 2011 11:53 pm

Pacal wrote:Performance chasing and recency bias are not behind my EM allocation noted above (30+ %). China, the most represented country in my EM fund (VWO), is clearly on its way to becoming the next superpower. India, the seventh most represented country in my EM fund, could also possibly achieve superpower status during my lifetime. Because of this personal outlook on the future economic landscape, I'm simply trying to tap into the potential rewards of investing in those up and coming economic juggernauts, among others. Furthermore, emerging markets are by nature where the greatest future growth is expected to occur.

Will I end up being correct with my outlook of the future economic landscape? I have absolutely no idea. But I don't think anyone else really does either. I stress that this is MY outlook, which has absolutely no qualifications behind it. But going with hunches is part, albeit a very small part, of investing.


Note: this is coming from someone who overweights EM, but ... I've seen it discussed here on the forum that economic growth is often inversely correlated with relative equity growth. In other words, the countries growing their GDP fastest often have lower-than-average returns. That said, I still agree that to 'underweight' emerging as much as a market-cap approach does, well, it doesn't appeal to my sense of the world ;)
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Post by empb » Fri Mar 18, 2011 3:32 am

Pacal wrote:Performance chasing and recency bias are not behind my EM allocation noted above (30+ %). China, the most represented country in my EM fund (VWO), is clearly on its way to becoming the next superpower. India, the seventh most represented country in my EM fund, could also possibly achieve superpower status during my lifetime. Because of this personal outlook on the future economic landscape, I'm simply trying to tap into the potential rewards of investing in those up and coming economic juggernauts, among others. Furthermore, emerging markets are by nature where the greatest future growth is expected to occur.

Everybody already knows everything you've mentioned thus one should expect it to be priced into EM stocks accordingly.

Pacal wrote:Will I end up being correct with my outlook of the future economic landscape? I have absolutely no idea. But I don't think anyone else really does either. I stress that this is MY outlook, which has absolutely no qualifications behind it. But going with hunches is part, albeit a very small part, of investing.

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Emotion, pride, ego, dreams, and nightmares have nothing to do with the process, although some investors rely on little else."

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Post by erikrief » Fri Mar 18, 2011 4:55 am

I think Im starting to see where this is going. Returns are not based on growth, just as its not necesarily better to invest in Apple stocks(huge projected growth) than investing in some unknown undervalued company. I think my problem was that I was not looking at countries as if they were companies. I was also basing too much of my assumptions on the historic returns of EM vs everything else. These returns probably came from EM being quite undervalued at the begining either because people did not know enough about them or because they were rather inaccesible. So in the future returns will probably not be as high.

However, I do think historic returns ARE very important when considering your asset aloccation as this is exactly how DFA designs their portfolios and theories about how to maximize profits by getting the most out of the beta in equities. The only thing that troubles me is that risk that can not be diversified away is supposed to give extra returns, and i think this still exists in Emerging Markets.

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Post by marco100 » Fri Mar 18, 2011 5:28 am

if i lost 90% of my investment tomorrow it would not really affect me


I think this is a very interesting statement which should be explored. Others have talked about percentage allocations to EM, I don't need to.

Just because you do not believe a 90% loss would affect you, does not mean you should make an investment decision based on your belief that it will not affect you. This is a behavioral finance issue IMO. In fact, even if you are correct in thinking that a 90% loss won't affect you (which you might not be, by the way, it may affect you after all even if you don't think it will right now), that is NOT the basis upon which you should make an investment decision.

Rather, you should ask yourself "Based on the information I have available to me right now what investment choice will OPTIMIZE my portfolio's risk/return characteristics?"

Because, the possibility that you MIGHT lose 90% SHOULD affect your decision-making about what to invest in. There is no rational reason for ANYONE to knowingly take a risk of a 90% loss.

To get the right answers, you have to ask the right questions. "I don't care if I lose 90% of my money" is an answer which suggests you probably shouldn't be making very risky investments at all, or rather, that you seriously need to cut down on the riskiness of your portfolio, whatever it is, because you are insufficiently sensitive to risk of loss, psychologically speaking, to be able to protect yourself.

IOW you may have a psychological or behavioral bias to want to assume excessive/suboptimal level of investment risk. In the case of EM it may simply be a function of performance chasing as EM has done very well over the last decade or so. Going forward is a different story.

So, the right question to ask is "How would I structure my portfolio if I DO CARE about trying to avoid a significant loss?" Because you SHOULD care about NOT LOSING money. You see investment success isn't just about MAKING MORE THAN YOU ALREADY HAVE. It's also about NOT LOSING what you already DO have.

fundtalk
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Post by fundtalk » Fri Mar 18, 2011 8:43 am

This is perfomance chasing, nothing more, nothing less. And, I'm not just talking about the 100% EM portfolio, I'm also referring to your current portfolio.


If you started 1997 with $10000 in both the S&P 500 and EM index, by the fall of 1998 you'd have about $15000 in your S&P 500 fund and $5000 in your EM fund. I think the other older investors will vouch for this, it was really, really hard just having to rebalance into EM back then. I would estimate that not even 1 in 100,000 investors would've stuck out a 100% EM portfolio.

The market is an expensive teacher. This board is about investing, not speculating. Your portfolio is a speculation. I'd strongly suggest reading Bill Bernstein (who put me on the right path in the 1990's) and Larry Swedroe about portfolio construction.

Good luck.

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tadamsmar
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Re: How much allocation to Emerging Markets is too much?

Post by tadamsmar » Fri Mar 18, 2011 10:19 am

erikrief wrote:Ive been looking around everywhere and i cant seem to find a coherent and valid answer to my question. Everyone usually recomends that you invest a portion of your assets in EM, ranging from 10% - 30%. The thing is that Im 25, so i have at least about 40 more years to go before i need to touch my investments in the worst of cases and because of this i have a feeling of complete imunity to volatility. In fact, ive been reading the Boglehead theory so much that in a wierd way im kind of exited when the market goes down and i happen to have extra cash on hand to rebalance. Ok so the question is: Why wouldnt i want to make Emerging Markets 80% of my portfolio, or even more. My time horizon is very long and if i lost 90% of my investment tomorrow it would not really affect me I have a very very long time to make it up. With time i would balance out to a more conservative portfolio but that would not happen in a very long time.
My portfolio rightnow is this but i think its just way to conservative:

US Large Cap 5%
US Large Cap Value 8.5%
US Small Cap 10%
US Small Cap Value 16%
US REITs 3%

Large Cap International Developed 9%
Small Cap Int Developed 11%
Small Cap Int Developed Value 12%

Emerging Large 14%
Emerging Small 9%
Foreign REITs 3%


You might want to read the current edition of Random Walk Down Wall Street. See the Life-Cycle Investing Model. Malkiel is pretty agressive with EM, but not 80%.

Could be that 80% could even lower your expected risk-adjusted returns. You don't want to do that. Extreme lack of diversity can have that effect.

freebeer
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Location: Seattle area USA

Post by freebeer » Fri Mar 18, 2011 10:27 am

empb wrote:If I were to guess, I'd say 9/10 of this forum's insistence on overweighting EM is some cocktail of recency bias and performance chasing...


I completely disagree that this forum in general has any such "insistence", indeed if anything the insistence is on overweighting US and underweighting international - contrary to the Bogleheads "own the market" core principle. I.e. any "overweighting" of EM frequently recommended is mainly a side effect of a grossly underweighted 20%-25% overall international slice whereas international is 2/3 of the global market so arguably should be 2/3 of equities in your portfolio.

Pacal
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Post by Pacal » Fri Mar 18, 2011 10:29 am

Sheesh, really empd and fundtalk?

I'm not playing "a game" or speculating with my retirement investing. How is seeing the obvious economic rise of China speculation? And no, don't bother answering that, I'm not interested in your comments at this point.

I simply answered the question by the original poster. I really don't care if you agree with my portfolio. It's my hard-earned money, my retirement. Why turn this personal? Simply state what you think is too much EM allocation and leave it at that. Don't attack others portfolios when they choose to divulge part of it. If you have constructive, uncondescending advice about such things, great, otherwise leave it alone. People come here for help, not ridicule. Who are you to point fingers of rebuke...

Since this post has turned negative, I'm done with it.

erikrief
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Post by erikrief » Fri Mar 18, 2011 10:49 am

fundtalk wrote:This is perfomance chasing, nothing more, nothing less. And, I'm not just talking about the 100% EM portfolio, I'm also referring to your current portfolio.


If you started 1997 with $10000 in both the S&P 500 and EM index, by the fall of 1998 you'd have about $15000 in your S&P 500 fund and $5000 in your EM fund. I think the other older investors will vouch for this, it was really, really hard just having to rebalance into EM back then. I would estimate that not even 1 in 100,000 investors would've stuck out a 100% EM portfolio.

The market is an expensive teacher. This board is about investing, not speculating. Your portfolio is a speculation. I'd strongly suggest reading Bill Bernstein (who put me on the right path in the 1990's) and Larry Swedroe about portfolio construction.

Good luck.


Lets forget about the hypothetical 80% EM portfolio for a moment. I think its interesting that you find my current portfolio is based on performance chasing, because the way i selected it was based on a lot of different concepts which i learned about while reading about passive index investing. In particular the most influential model portfolio to me was from the book Index Funds: The 12 step program for the active investor, which i think is a pretty great book especially for people new to Passive Index Investing. Its writen by the International Fund Advisors which are closely related to DFA Funds or something along those lines. If anybody is familiar with this book, they have recommended portfolios for every age. And what i did was take the most aggressive one. Which is designed for people my age, and based on the concept that small value tilt gives you better long term returns, gave much more weight to those areas. Under this same principle i gave more weight to EM also and to small cap EM. So although looking at historical returns might be in a way "performance chasing" i dont feel that that was really mi criteria for picking my allocation.
This is the model portfolio im talking about.
IFA US Large Company Index 12%
IFA US Large Cap Value Index 12%
IFA US Small Cap Index 20%
IFA US Small Cap Value Index 20%
IFA Real Estate Index 5%
IFA International Value Index 6%
IFA International Small Company Index 6%0.74
IFA International Small Cap Value Index 6%
IFA Emerging Markets Index 4%
IFA Emerging Markets Value Index 4%
IFA Emerging Markets Small Cap Index 5%

Valuethinker
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Re: How much allocation to Emerging Markets is too much?

Post by Valuethinker » Fri Mar 18, 2011 10:56 am

erikrief wrote:Ive been looking around everywhere and i cant seem to find a coherent and valid answer to my question. Everyone usually recomends that you invest a portion of your assets in EM, ranging from 10% - 30%. The thing is that Im 25, so i have at least about 40 more years to go before i need to touch my investments in the worst of cases and because of this i have a feeling of complete imunity to volatility. In fact, ive been reading the Boglehead theory so much that in a wierd way im kind of exited when the market goes down and i happen to have extra cash on hand to rebalance. Ok so the question is: Why wouldnt i want to make Emerging Markets 80% of my portfolio, or even more. My time horizon is very long and if i lost 90% of my investment tomorrow it would not really affect me I have a very very long time to make it up. With time i would balance out to a more conservative portfolio but that would not happen in a very long time.
My portfolio rightnow is this but i think its just way to conservative:

US Large Cap 5%
US Large Cap Value 8.5%
US Small Cap 10%
US Small Cap Value 16%
US REITs 3%

Large Cap International Developed 9%
Small Cap Int Developed 11%
Small Cap Int Developed Value 12%

Emerging Large 14%
Emerging Small 9%
Foreign REITs 3%


Hi

There is no reason to think that EM will outperform other markets in the long run.

US listed companies do business in China, so do European listed ones.

Whilst if you can find the right Small Cap Value products, and particularly international SCV products, over a 40 year period you do have a good chance of outperforming markets as a whole,

there's no comparable body of evidence regarding EM, except to note that markets which were 'Emerging' 100 years ago, often underperformed developed markets (US is the 3rd best performing market over 110 years, I believe).

So you should not have EM more than the world stock market indices weight in EM.

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DartThrower
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Location: Philadelphia

Post by DartThrower » Fri Mar 18, 2011 11:20 am

The Wizard wrote:
erikrief wrote:...since index investing is not the most popular way to invest.

Says who???


You might want to read the article "If Index Funds Perform Better, Why Are Actively Managed Funds More Popular?" Referencing research done by Robert F. Stambaugh and Lubos Pastor.

Link:

http://knowledge.wharton.upenn.edu/arti ... cleid=2702


From the article...

Indexing, or "passive management," accounts for only about 13% of assets in mutual funds holding stocks. It doesn't seem to make sense. Experts have offered a variety of explanations: Investors are duped by slick managed-fund marketing, they don't know the facts or they believe "you get what you pay for" -- that paying higher active-management fees should buy better results. Maybe they are deferential to "professionals," or believe they are smart enough to pick the active managers who are better than average.


In any case indexing, although becoming more popular, is still in the minority.
A Boglehead can stay the course longer than the market can stay irrational. It's impossible to have a bubble in common sense.

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