International Exposure, Part Deux

[brewer12345]

I have rolled over a 401k that was basically invested in international equities (FDIVX, expensive, but not terrible) plus a littlre US fixed income. I am planning on using the funds to top up my commodities exposure (PCRDX), boost my unhedged non-US bond exposure (GIM), and toss the rest of it into international equities. I think the bulk of it will go into EFA for simplicity and low cost. What I am toying with is whether I want to bother with a small amount of emerging markets exposure. Looks like the default option is EEM, but it is expensive (75BP annually) and quite volatile, although I am thinking about an amount that is ~2.5% of the portfolio. Is it worth bothering with? The bulk (~65%) of my port is in US equities, mostly small cap value, so the non-US stock and bond, commodity, and other exposure is strictly for diversification purposes. Is there anything more attractive than EEM? Keep in mind that my accounts are at Schwab, so I effectively do not have access to Vanguard's funds.

 

[KB]

Is there any reason why you don't roll it into Vanguard? Or part of it? I rolled a 401K into VG, but all of it. I don't know if you can split it up or not. Might be worth checking into if you want a VG fund.

 

[Nords]

I'd say that for the size of the investment, its expense, and its miniscule effect on your total portfolio return-- it's a lot of hassle.

EFA tempts me every time I look at Tweedy, Browne's 1.37% ER.  But how would EFA be affected over the next three-to-five years if the dollar flattened and then started getting stronger?

 

[brewer12345]

I could easily roll part or all into a Vanguard account, but I have zero interest in doing so. I deal with enough different financial institutions (5 banks, 1 credit union, 2 brokers) without adding any more to the list. In any case, Schwab has 99% of what I want and at reasonable prices and good service.

Obviously, a strong dollar would hurt unhedged foreign investments. However, I am doing all of this for diversification purposes, which includes currency diversification. Unhedged EAFE has low correlation (.3 to .5, depending on who you believe) with US stocks and bonds. Unhedged foreign bonds have low or negative (.1 to -.3) correlation with US stocks and bonds. Commodities have negative (-.5 or so) correlation with US stocks and bonds. This makes all of these asset classes VERY attractive as a diversifier to US equity-heavy portfolios. The fact that commodities and EAFE have roughly equal expected return to US equities is a major added boost.

1.37% ER? That's why I am glad to be rid of FDIVX.

 

[yakers]

Brewer, I have a question. Have you compared the returns of your AA to simpler ones? You have really detailed great sounding AA plan. I wouldn't know where to suggest something that I honestly thought could improve it. (Maybe change it to personal preferences, but not improve it.) But unless 1) You really like the financial business or 2) You have enough money that it justifies the time spent managing it I would just go for something simpler. I know how to calculate the returns on simmple AAs, it would take a lot more work on complicated ones and it would have to include issues like TIPS which don't have much history. I had a Quick & Riley trading account and did pretty well ( seems I colud figure out when to buy, figuring when to sell is another matter) but I closed it as the trading fees cut too far into my returns and it just wasn't worth my time and effort. Now if I had a large account it might be worth it but mayby the worry factor would go up.

Anyway, when I see complicated AAs and slice & dice approaches I just wonder, has it been worth it for you? Maybe when I retire in the next couple years and shift from the accumulation to the spending phase I will have the time and find it of interest to do more direct management. So far I have not found it to be worth it, for me, and I wonder if it has payed out for you or if you just find it mentally invigourating to keep so engaged?

 

[brewer12345]

Brewer, I have a question. Have you compared the returns of your AA to simpler ones? You have really detailed great sounding AA plan. I wouldn't know where to suggest something that I honestly thought could improve it. (Maybe change it to personal preferences, but not improve it.) But unless 1) You really like the financial business or 2) You have enough money that it justifies the time spent managing it I would just go for something simpler. I know how to calculate the returns on simmple AAs, it would take a lot more work on complicated ones and it would have to include issues like TIPS which don't have much history. I had a Quick & Riley trading account and did pretty well ( seems I colud figure out when to buy, figuring when to sell is another matter) but I closed it as the trading fees cut too far into my returns and it just wasn't worth my time and effort. Now if I had a large account it might be worth it but mayby the worry factor would go up.

Anyway, when I see complicated AAs and slice & dice approaches I just wonder, has it been worth it for you? Maybe when I retire in the next couple years and shift from the accumulation to the spending phase I will have the time and find it of interest to do more direct management. So far I have not found it to be worth it, for me, and I wonder if it has payed out for you or if you just find it mentally invigourating to keep so engaged?

Good question, yakers. I am, as they say, "in the business". I work in the asset management industry and have years of related education, etc. By inclination and long years of training, I will be pursuing a more sophisticated approach.

Is it worth it? I would say yes, based on my own personal experience as well as decades of academic research and institutional investment management empirical studies. But I think there is an important caveat here: if you cannot do the more sophisticated stuff yourself, an individual is not likely to come out ahead if they have to pay someone else to do it for them. That is, by the time you finish ponying up for services (assuming you even got someone who was any good), you probably would have been better off with a balanced fund like Wellington plus some international exposure.

As I have observed before, the critical factors for ER do not really include getting the highest investment returns. Learning to live cheaply and socking away a high percentage of one's income are far more important than getting a couple of extra points in your portfolio. My diversification efforts are actually part of an effort to stop shooting the moon, which is what I tend to do if left to my own devices.

 

[sailor]

I am planning on using the funds to top up my commodities exposure (PCRDX)

brewer,
I'm curious why PCRDX and not PCRIX?
Is it because you don't want to go to Vanguard or TD Waterhouse?

 

[Spanky]

brewer,
I'm curious why PCRDX and not PCRIX?
Is it because you don't want to go to Vanguard or TD Waterhouse?

I prefer PCRIX because its lower expense ratio. However, my brokerage account is with Etrade that does not offer PCRIX but PCRDX. I am considering opening an account with Vanguard since I also have a regular (non brokerage) account with them.

Spanky

 

[wildcat]

He is not with Vanguard hence no PCRIX

 

[sailor]

He is not with Vanguard hence no PCRIX

But he is with Schwab and they do offer PCRIX.
Only their minimum is $1M

 

[wildcat]

Ahhh well I know Brewer can fit the bill

 

[brewer12345]

Ahhh well I know Brewer can fit the bill

Hahahahahahah!!! I wish. Yeah, I can't meet the minimum for PCRIX at Scwab, and considering it us ~8% of my portfolio, its not worth the 50BP to go elsewhere.