What exactly are "emerging markets"?

[thefed]

I'm on the prowl for a new Vanguard Fund to buy. I will be contributing through my Simple IRA. I came across "Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX)".

I see that the holdings are concentrated in Korea, China, Taiwan, Brazil and Russia. what makes these "emerging' markets??

I see some pretty sideways prices for about 5 yrs from 98 til 2003, then an explosion which hasnt slowed down. My gut says to stay away because it cant continue on in this manner, right? lol...if we only knew


I've recently looked my asset allocation for the first time, and realized I'm a lot more conservative than many of my peers (im 24 yrs old).

Right now 65% of my money is in an FDIC insured savings yielding 5.4%. The other 35% is in Vanguard LifeStrategy 2045 (2 separate IRA's).

I figure it's time to step up the risk/equities, so I'm looking for a good candidate. I'll be DCA into this account monthy for the next 20 or so years,if all goes as planned. Any other suggestions/comments?

 

[brewer12345]

Before we even touch the topic of emerging markets, I see a more fundamental issue you need to deal with. Specifically, you should flesh out what you need your money to do for you, what your risk tolerance is, and what risk/compromises you need to accept in order to get where you need to go. Working through each of these steps should get you to the point of setting up an overall target portfolio that will get you where you waqnt to be and that you can live with. Only after that should you go shopping for specific funds.

Give you an idea: I want my portfolio to get me to FIRE within 10 years. I have a pretty good idea of how much I need to pile up and what my annual contributions will be. I have a pretty high risk appetite and my downside risk is basically working a little longer. Knowing all of this, I can back into what return I need to shoot for and set up an appropriate portfolio, which for me is heavy on small caps, international growth equities, value, and junk bonds. But as I get older and get closer to my goal, I am incrementally shifting my portfolio and taking other steps like paying down debt.

 

[thefed]

thanks for the very well-put post Brewer!


so....what's an emerging market? lol


i have been really avoiding owning multiple funds to this point because i dont want the hassle. Thats why i settled on the 2045. I just recently decided to add a slightly more risky fund with more upside potential as it will only make up 10% or so of my portfolio. Im not confident enough to dump a large sum of $$ from my savings into the market now to rebalance, so I'll be just playing a little catch-up with a riskier fund with more upsidepotential.

I plan to start drawing down my nestegg in 20 years, 2027. At that point I can live comfortably on my withdrawals. I need to earn 6.25% over the next 20 years to realize my goals.


I hope I explained better. I really got into a totally different topic in the first post that has little to do with the question "what exactly is an emerging market?" I just thought i'd qualify my question a bit for ya!

thanx!

 

[maddythebeagle]

Emerging markets - Wikipedia, the free encyclopedia

 

[DblDoc]

thefed;

I second brewers recommendation. You need to do some background reading/research and determine your risk tolerance, goals etc. You are invested in a target fund that is aggressive already (90%stocks:10%bonds) and would remain so if you are planning on FIRE in 20 years ie 2027. It also already contains emerging markets in it. While I can understand you wanting to put that other 65% of savings to work for you it is earning a reasonable rate now so there is no hurry and you have a long investment time frame. Take the time and energy to do it right now and you will be amply rewarded.

DD

 

[Spanky]

I've recently looked my asset allocation for the first time, and realized I'm a lot more conservative than many of my peers (im 24 yrs old).

Right now 65% of my money is in an FDIC insured savings yielding 5.4%.

That's really conservative for a 24-years of age investor. Depending on your risk tolerance, a 5 to 10% in emerging markets (or developing nations) is fine. These markets suppose to grow faster than those of developed nations (i.e., U.S) but the risks are higher because of political instability, differences or lower standards in accounting, auditing and financial reporting, trading systems.

 

[Texas Proud]

Brewer, like always when it comes to investing, is spot on....

But like others have said, you are way to conservative at your age... heck I am almost 50 and I am 90% stock with about 4 to 5% emerging market...

However, I am just starting to look at the RE part and will be moving it down to maybe 70% or even 60% over the next few years...

 

[haha]

But like others have said, you are way to conservative at your age... heck I am almost 50 and I am 90% stock with about 4 to 5% emerging market...

Texas Proud, what sort of job do you have? What back-ups or lack of back-ups are in place for you? IMO, strong advice like "You are way too conservative for your age" should come with some disclosure about the advisor.

In Feds case we do have some information. We know he has a young son, and another baby on the way. We know that he runs a duct cleaning business that is just getting off the ground. We know that his GF and mother of his kids is not a government worker, or lawyer or doctor, and that she likely depends largely on Fed for support. We do not know (at least I do not know) what his debts are, or how much total invested assets he has, or how much liquid assets he has, or what is the nature of his insurances including life and health insurances.

So while you may be right that he is "Way too conservative," it is also possible that given his business and life situation he is well served by those CDs. All he needs is to be heavily invested in stocks in some future possible bear market, at the same time that he has cash needs in his business or cash needs in his family. Then those rejected CDs are going to look pretty good.

In fact, I would be willing to say that an entrepreneur is in a very different position from a save-and-invest man or woman with a secure job and corporate- or even better -government backstops. If Fed really hits it in his business he may not even need to take the approach of extreme frugality that many here have taken. And as we all know I am sure, running out of cash has sunk many a fundamentally good business.

Ha

 

[thefed]

Texas Proud, what sort of job do you have? What back-ups or lack of back-ups are in place for you? IMO, strong advice like "You are way too conservative for your age" should come with some disclosure about the advisor.

In Feds case we do have some information. We know he has a young son, and another baby on the way. We know that he runs a duct cleaning business that is just getting off the ground. We know that his GF and mother of his kids is not a government worker, or lawyer or doctor, and that she likely depends largely on Fed for support. We do not know (at least I do not know) what his debts are, or how much total invested assets he has, or how much liquid assets he has, or what is the nature of his insurances including life and health insurances.

So while you may be right that he is "Way too conservative," it is also possible that given his business and life situation he is well served by those CDs. All he needs is to be heavily invested in stocks in some future possible bear market, at the same time that he has cash needs in his business or cash needs in his family. Then those rejected CDs are going to look pretty good.

In fact, I would be willing to say that an entrepreneur is in a very different position from a save-and-invest man or woman with a secure job and corporate- or even better -government backstops. If Fed really hits it in his business he may not even need to take the approach of extreme frugality that many here have taken. And as we all know I am sure, running out of cash has sunk many a fundamentally good business.

Ha

very true. the business is one of several reasons i like to keep so much cash on hand. if anything, it just makes me feel better! BUT, all of my savings for a good time will be directed to my funds, and thus, should even out the balance slowly



thank you all for your input so far...its given me some things to consider

DblDoc: I guess im a bit confused as to what to do next. I know my target earning percentage, 6.25 (if i can earn that, i will succeed in my 20 yr plan). Risk tolerance seems to be pretty vague " i'm pretty risk averse" or" I have a slightly higher risk tolerance than others" these seem to be the statements made by those who have assessed their situation. well, either of those can mean many things to many people. i dont think there really can be a quantitative analysis of these kind of things, instead its more of a personal interpretation. Well, my risk analysis is i need to earn about 6.25 averaged over the next 20 years. If I don't, I will be pissed off. Does that help? lol


thanks guys

 

[Spanky]

Here is a link to Vanguard's measurement of risk tolerance: https://personal.vanguard.com/VGApp/hnw/planningeducation/college/PEdCollInvTemperamentContent.jsp

 

[thefed]

Here is a link to Vanguard's measurement of risk tolerance: https://personal.vanguard.com/VGApp/hnw/planningeducation/college/PEdCollInvTemperamentContent.jsp

based on that, im moderate-aggressive ... although im demonstrating a conservative mindset right now. What does that tell you?

 

[brewer12345]

based on that, im moderate-aggressive ... although im demonstrating a conservative mindset right now. What does that tell you?

That tells me that you can afford more risk than you take but don't really need to stretch for return. I would suggest that you figure out what your max reasonable liquidity requirement might be and retain that much in cash plus a cushion. The rest of your capital you can consider investing more aggressively if you wish.

 

[armor99]

Hi TheFed..... I actually have 1/3 of my Roth IRA currently in Vanguard's VEIEX. It has been there for around 2 years or so. Like most folks on this forum I chart my returns regularly, and keep tabs on how my various investments are doing. By my calculations, as of today VEIEX has gone up over 30% for me (it is also currently the highest performing fund that Vanguard has as of today). That is just insane kind of growth. Until the recent market turn around, it was the only thing saving me from having a really bad investment year. As much as I would love to think that the party will continue for VEIEX, I think at the end of this year I will move on to something else. I just have a really hard time believing that any fund that has a 30% + year is not heading for a fall, and quickly. I hope things can at least continue till Jan 1. Just my thoughts....

 

[tightasadrum]

.

I plan to start drawing down my nestegg in 20 years, 2027. At that point I can live comfortably on my withdrawals. I need to earn 6.25% over the next 20 years to realize my goals.

thefed,

Keep in mind that, at least IMHO, inflation is your biggest risk, not the market ups and downs. And 6.25% is not beating inflation in any meaningful amount. Some would say not at all. When you determined that you would be fine at a return of 6.25%, what inflation rate did you factor into your calculations? The way they're printing [-]counterfeit[/-] new money right now to bale out the lenders, the real risk of higher inflation lurks all around us. From your name I'm betting you are planning on a federal ,inflation-adjusted pension, right? If so, you have even more margin to factor in more equity risk.

Of course, you still have to sleep at night. But inflation is what keeps me up at night.

 

[thefed]

I used an inflation rate of approximately 5% (not compounded) for all of my expenses. For example, my electric bill is 100 dollars now, and i am prepared for it to be 200 in 20 years. Auto insurance is 60 now and 120 then etc

And no, i i am not expecting any sort of pension. I wish. Im self employed.


armor99: i agree with the apprehension towards more growth like that...thats why i wanted to learn more about emerging markets so i could see why they were doing that

brewer: excellent advice as always . thanks

 

[Texas Proud]

Texas Proud, what sort of job do you have? What back-ups or lack of back-ups are in place for you? IMO, strong advice like "You are way too conservative for your age" should come with some disclosure about the advisor.

In Feds case we do have some information. We know he has a young son, and another baby on the way. We know that he runs a duct cleaning business that is just getting off the ground. We know that his GF and mother of his kids is not a government worker, or lawyer or doctor, and that she likely depends largely on Fed for support. We do not know (at least I do not know) what his debts are, or how much total invested assets he has, or how much liquid assets he has, or what is the nature of his insurances including life and health insurances.

So while you may be right that he is "Way too conservative," it is also possible that given his business and life situation he is well served by those CDs. All he needs is to be heavily invested in stocks in some future possible bear market, at the same time that he has cash needs in his business or cash needs in his family. Then those rejected CDs are going to look pretty good.

In fact, I would be willing to say that an entrepreneur is in a very different position from a save-and-invest man or woman with a secure job and corporate- or even better -government backstops. If Fed really hits it in his business he may not even need to take the approach of extreme frugality that many here have taken. And as we all know I am sure, running out of cash has sunk many a fundamentally good business.

Ha

Ha... I think I said I was approaching 50... am an accountant at a large corp... Have an MBA in International Finance.... used to be a trustee on many kind of corp debt.. I handled some of the more complex trust about 8 years ago... now, just do grunt work in the real estate dept...

But, The Fed said it was his IRA money he was talking about... so it is invested for the long term and should be at a higher risk... we are talking 30 to 40 year time horizon here, not 1 to 5. He should be able to weather the next 4 or more recessions that will happen before he would (or should I say should) need this money...

I agree that he should have money set aside for all the other things you pointed out... money for a downturn in business, money for unexpected house, health, car, etc disasters... and his other money that might be used up in his adventures could be conservative... but retirement money??

 

[haha]

Ha... I think I said I was approaching 50... am an accountant at a large corp... Have an MBA in International Finance.... used to be a trustee on many kind of corp debt.. I handled some of the more complex trust about 8 years ago... now, just do grunt work in the real estate dept...

But, The Fed said it was his IRA money he was talking about... so it is invested for the long term and should be at a higher risk... we are talking 30 to 40 year time horizon here, not 1 to 5. He should be able to weather the next 4 or more recessions that will happen before he would (or should I say should) need this money...

I agree that he should have money set aside for all the other things you pointed out... money for a downturn in business, money for unexpected house, health, car, etc disasters... and his other money that might be used up in his adventures could be conservative... but retirement money??

Thanks Texas- I missed that he had specified retirement money. So everything I said was beside the point!

Ha

 

[Texas Proud]

Thanks Texas- I missed that he had specified retirement money. So everything I said was beside the point!

Ha

Your welcome... but I do agree with you that if it was not retirement money it is a whole new question..

And, I am not saying he should jump into emerging markets big time... just get more stock funds.

 

[FinanceDude]

Interesting that you can now buy BRICK funds:

Brazil, Russia, India, China, Korea

Those are your most notable ones, I guess to a lesser extent Vietnam and maybe Turkey..........

 

[RetireDon]

I agree with the risk discussion above and certainly your business needs enter into it, but at your age, you have a whole lot of time to recover should the returns not be so great for a cycle. IMHO, allocating a part of your funds to VEIEX (emerging markets) will give you a good upside while allowing you to keep most of your assets in the CD's.

I'm 62 and retired and have been in the VEIEX for about 2 years (about 10% of my portfolio). This biggest problem with it is the growth is so fast that it screws up my asset allocation and I have to rebalance more often than planned. VEIEX is up more than 31% so far this year. That's equivilent to having 6 times as much invested in 5.5% CD's

 

[bow-tie]

This my be a hi-jack. If so, my bad.

Brewer's initial post to this topic was great. That being said, if I take his advice and decide I need 7% growth for the next 10 years, how do I go about finding an optimum portfolio? I assume I should know the the return, standard deviation, alpha, correlation, etc among my different investments.. Vanguards funds, let's say. Is there a tool that allows me to use all of the just-mentioned metrics to come up with a reasonably optimum portfilio to hit my 7%. If so... were is it? What does it cost, if anything?

 

[brewer12345]

how do I go about finding an optimum portfolio? I assume I should know the the return, standard deviation, alpha, correlation, etc among my different investments.. Vanguards funds, let's say. Is there a tool that allows me to use all of the just-mentioned metrics to come up with a reasonably optimum portfilio to hit my 7%. If so... were is it? What does it cost, if anything?

There are lots of tools, even some very sophisticated ones, but I would look at all of them skeptically. Why? Asset classes have certain historical standard deviations, correlations, returns, etc., which are the basis for most of what the portfolio optimizers spit out. The problem is that all of these variables are prone to change over time, making the optimized portfolio no longer the best. For example, foreign equities are far more highly correlated with domestic equities. So if you were counting on that diversification, you aren't getting it any more.

So what to do? First, recognize that there are limits to optimization. Second, use historical data because it is the best indicator we have, but take it with a grain of salt. Third, use common sense.

So a sensible portfolio should probably contain a wide selection of the available asset classes: Investment grade US bonds, junk, non-USD bonds, US equity, foreign equity, real estate, commodities, maybe some arbitrage vehicles, TIPS, etc. I think the difference between what someone with a lot of risk tolerance & high return goal and what someone with moderate risk tolerance and return goal holds should mostly be in the weights assigned to each asset class. If you are risk tolerant, you would overweight US and foreign small caps, equities, junk and maybe RE. If you are less risk tolerant, you would mix in more high grade bonds, TIPS, commodities, foreign bonds and cash. But how much of each ultimatly comes down to a judgement call because the fancy math of the optimizer is very misleading.

Or just chuck it all into Welllington/Wellesley.

 

[bow-tie]

Thanks Brewer.

Knowing that everything is backward looking, and correlations change over time, I was half-expecting an answer similar to what you gave.

I just don't want to take on any more deviation than necessary and still hit my return target.

Your insight is always appreciated.

 

[Spanky]

another approach is to equally weight all the asset classes for both the equity and the fixed-income portions. Determine your equity/fix-income ratio, select the asset classes for each portion and then equally divide them.