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Emerging Markets
Old 02-24-2014, 10:50 AM   #1
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Emerging Markets

First off I am not selling ..

My 5% Emerging Markets portion of my portfolio stinks.

my feelings of selling may mean that it is a strong buy---
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Old 02-24-2014, 11:03 AM   #2
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I keep 10-11% in EM. The volatility adds entertainment and excitement value.
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Old 02-24-2014, 11:04 AM   #3
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I am glad to see you started this thread on emerging markets. I currently have about 2% of my portfolio in emerging markets and am leaning towards increasing my allocation to 5%. But I agree that recent performance has been weak, so I was wondering what others have been doing.

My choice of a 5% target allocation is a little arbitrary. My thinking is that anything less than 5% won't move the needle much on performance, even if I'm right that this segment is due for a rebound. On the other hand, anything more than 5% leaves my portfolio vulnerable to continued losses in a highly volatile portion of the market.
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Old 02-24-2014, 11:51 AM   #4
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I have 16% in EM, plus 4% in Frontier Markets, both of which did really well before 2008 but not so well after. That's my AA. I expect that in a few years the situation will reverse and EM and FM will start looking really good. And over my entire retirement, they will probably do about the same as the US market, just different. I've been buying EM and FM to maintain my allocations, and I've been Roth converting my EM and FM while they are low to minimize taxes.

The US market has been really strong for a few years now. Anything outside the US is going to look like a drag on the portfolio.
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Old 02-24-2014, 01:29 PM   #5
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I've similarly been buying to maintain my AA. Vanguard started 2 new ETFs, VWO and VWOB, that I've been purchasing.
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Old 02-24-2014, 01:32 PM   #6
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Half my portfolio is in equities, half that is US, the rest equally split between int'l and EM, so that means 12 1/2 % in Emerging Markets, pretty evenly split between an index and two active funds.
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Old 02-24-2014, 02:04 PM   #7
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I have always thought that the term "emerging" was a bit too complementary a term for these markets. Emerging has two definitions, becoming known, and rising, but the way it is used I think gives the connotation of improving or rising destiny.

Now of course for most of these countries you could argue that there is no way to go but up, and over the long term will undoubted be true. But what is the long term?

To my mind there is so much corruption in many of these countries, and so much volatility, and so little history from which to make projections, it is really just gambling. Especially since how much do we really know about what we are investing in? What do we know about the market, the legal system, the corruption, how they do their accounting?

When we invest in a good American or other developed market index fund, we have at least some idea of what that economy, judicial system, and markets are like.

Personally I don't have anything in emerging markets, and realize I might be missing out on some very large moves. But from what I have seen you have to time these markets. Because you are more likely than not going to be riding up a speculative bubble, and getting out before the pop.

Then again, the country could really emerge and become a developed country. But I think a lot if not most of the people investing in these "developing" markets are investing more on hope than information. I know for me I don't have the knowledge necessary to invest there. So I don't.
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Old 02-24-2014, 02:15 PM   #8
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Let's see - 20% of my Intl equity is EM. Int'l is 26% of my total equity. Total equity is 45% of my total investments. Looks like 2.34% of my portfolio is EM. That seems a little light on both the Int'l and EM %. Once I ER and take out cash/SV funds for the first few years I plan to allow the equity portion to drift up to 50%, with Intl at 30%of equity and keep EM at 20% of the Int'l. Still this will only be 3% of the portfolio. It's not a big deal either way.
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Old 02-24-2014, 02:21 PM   #9
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I have always thought that the term "emerging" was a bit too complementary a term for these markets. Emerging has two definitions, becoming known, and rising, but the way it is used I think gives the connotation of improving or rising destiny.

Now of course for most of these countries you could argue that there is no way to go but up, and over the long term will undoubted be true. But what is the long term?

To my mind there is so much corruption in many of these countries, and so much volatility, and so little history from which to make projections, it is really just gambling. Especially since how much do we really know about what we are investing in? What do we know about the market, the legal system, the corruption, how they do their accounting?

When we invest in a good American or other developed market index fund, we have at least some idea of what that economy, judicial system, and markets are like.

Personally I don't have anything in emerging markets, and realize I might be missing out on some very large moves. But from what I have seen you have to time these markets. Because you are more likely than not going to be riding up a speculative bubble, and getting out before the pop.

Then again, the country could really emerge and become a developed country. But I think a lot if not most of the people investing in these "developing" markets are investing more on hope than information. I know for me I don't have the knowledge necessary to invest there. So I don't.
That's where an active fund is nice. I use Wasatch funds (WAEMX, WAESX, WAMFX) for some of my exposure. They visit the companies they invest in, and ones they don't, and investigate the banking system in each country. That makes them more expensive, but fixes your knowledge problem. I also use EEM, DEM, DGS, and FRN, with lower costs but less selectivity.
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Old 02-24-2014, 05:10 PM   #10
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That's where an active fund is nice. I use Wasatch funds (WAEMX, WAESX, WAMFX) for some of my exposure. They visit the companies they invest in, and ones they don't, and investigate the banking system in each country. That makes them more expensive, but fixes your knowledge problem. I also use EEM, DEM, DGS, and FRN, with lower costs but less selectivity.
The problem I would have with this approach is that I don't trust managers to be able to time the historically and functionally better known U.S. markets, why would I trust them to be able to time some small offshore market?
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Old 02-24-2014, 06:31 PM   #11
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I think one has to realize that emerging markets index funds go up and they go down more than the general market. One has to be able to buy in the face of substantial drops and hold off buying when EM drops just a little or doesn't drop at all. One has to sell when it pops, too. So set those rebalancing bands larger than you would for US stocks and be prepared for the pain.

I would say the the LOL!'s market timing newsletter has done OK with EM buys and sells.
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Old 02-24-2014, 06:33 PM   #12
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@OP. You are too impatient. Is your strategy sound? Then stick to it. Your EM stocks will pay off. Just not today.
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Old 02-24-2014, 06:38 PM   #13
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This gives a good pictorial view of the recent performance of the class.

callan.periodic.pdf
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Old 02-24-2014, 07:10 PM   #14
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I prefer to split the Internationals between larger cap and mid/small cap. I have Vanguard International Explorer (VINEX) for the mid/small caps.

EM isolated by itself is not for me.
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Old 02-24-2014, 07:17 PM   #15
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This gives a good pictorial view of the recent performance of the class.

callan.periodic.pdf
Interesting. From 1994 through 2013, out of 10 asset classes, EM was the best performer in 8 of the 20 years and the worst performer in 8 of the 20 years. That suggests a good amount of volatility.

Personally, 20% of my entire 70/30 portfolio is dedicated to international equities. Of that 20%, half is in total international (including the appropriate percentage of EM), and half directly in EM as a tilt. So about 12% of my total portfolio is in emerging markets. My plan is for half of the EM tilt to be in frontier markets, but I do not have an allocation in FM at this time (planned for this year).
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Old 02-24-2014, 07:50 PM   #16
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10% in EM and 10% REIT but rest of all have done well in this market. REIT was down 10% last year but recovered 5% ytd.
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Old 02-24-2014, 08:55 PM   #17
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To my mind there is so much corruption in many of these countries, and so much volatility, and so little history from which to make projections, it is really just gambling. Especially since how much do we really know about what we are investing in? What do we know about the market, the legal system, the corruption, how they do their accounting?
I agree. Indexing and the efficient market hypothesis work when there's a large amount of information freely available to a large pool of potential buyers. Some of the companies in these EM countries benefit from restrictions on where their own citizens are allowed to invest (artificially driving up stock prices/capitalization and thereby increasing the amount bought by index funds). And their books are generally not as open and often not subject to the same accounting standards. While some of these companies will probably do very well, I just don't think I can apply indexing to them. And I don't have any idea if active managers can really add value (do >they< have access to the real books? Can they know the intricacies of hundreds of thinly-traded stocks in far-flung markets? What would gaining that knowledge cost--specifically in the expense ratio charged?).
So, I don't go to any effort to seek out EM. When the equities enter the big intl indexes, then they'll get included in the MF's I already own. I'll probably miss out on some rising stars, but I'll miss a lot of duds, too.
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Old 02-24-2014, 09:23 PM   #18
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The problem I would have with this approach is that I don't trust managers to be able to time the historically and functionally better known U.S. markets, why would I trust them to be able to time some small offshore market?
I'm not asking them to time, just buy and hold. I'll ride the market up and down with them.
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Old 02-24-2014, 09:25 PM   #19
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But I agree that recent performance has been weak, so I was wondering what others have been doing.
Buying more. EM is about 10% of my equities.

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My choice of a 5% target allocation is a little arbitrary. My thinking is that anything less than 5% won't move the needle much on performance, even if I'm right that this segment is due for a rebound. On the other hand, anything more than 5% leaves my portfolio vulnerable to continued losses in a highly volatile portion of the market.
I don't think the exact percentage matters much as long as you aren't constantly twiddling with it.
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Old 02-24-2014, 11:55 PM   #20
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Here is part of the reason I felt it was more reliable to go the capitalization route split for international:




To be fair, I don't think any of us here have been continuous investors in this stuff since 1996. Still for my methods, I think I can capture more return with capitalization weighting my holdings (large vs mid) instead of slicing along developed and EM and maybe frontier. Still in a work in progress for all of us.
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