Vanguard Emerging markets at 10%

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Jon Luskin
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Re: Vanguard Emerging markets at 10%

Post by Jon Luskin »

DesertInvestor wrote: Thu May 06, 2021 5:01 pm
JonL wrote: Thu May 06, 2021 9:02 am
DesertInvestor wrote: Wed May 05, 2021 8:44 pm Hi,

Based on Jermey Grantham and current emerging market PE compared to US ect thinking about shifting 10% of international to emerging markets (currently 70% US and 30% international with 10% small value tilt). Slightly more complicated portfolio, but just makes me feel a little better continuing to contribute. Wondering how people feel about this?
When clients ask me about portfolio changes, I'm less concerned about the particular proposed allocation change as I am about the act of changing a portfolio.

If they green light this portfolio now, what about future portfolio changes? If, next week, they feel that inflation is a factor for your fixed income return, will they decide to increase your position to TIPS? What about the week after that, when they feel that real estate is overvalued and want to decrease exposure to REITs?

Much more important than a particular allocation is sticking with a particular allocation.

Consider, does it really make sense to make this change? Is this change really going to make a difference in long-term investing experience?

More importantly, what system or guidelines do they have in place to keep them committed to their existing allocation? Do they have an investment policy statement? If so, it may make sense to review it now. If not, it probably makes sense to create one.

I hope that helps. :-)

EDIT: For clarity.
Excellent advice!!! I do have a IPS, says I wait 3 months to change investment. So as i wait figured I would ask. Great advice all around!
I'm glad it was helpful! :D :D :D
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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DesertInvestor
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Re: Vanguard Emerging markets at 10%

Post by DesertInvestor »

ivgrivchuck wrote: Thu May 06, 2021 11:16 pm
DesertInvestor wrote: Thu May 06, 2021 4:49 pm
Very good summary! I noticed all you fixed income is EE and ibonds, is this due to avoidance of interest rate risk?
Best rates with the least risk. An easy choice.
Downside being you lack the liquidity to rebalance ect. Plus locked up on EE bonds for 20 years. Deciding myself whether to begin contributions in my early 40s.
asif408
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Re: Vanguard Emerging markets at 10%

Post by asif408 »

OP,

If you are influenced by Jeremy Grantham, I'm pretty sure you should look for an emerging markets value fund. To quote him from his most recent GMO paper (https://www.gmo.com/americas/research-l ... ast-dance/):
As often happens at bubbly peaks like 1929, 2000, and the Nifty Fifty of 1972 (a second-tier bubble in the company of champions), today’s market features extreme disparities in value by asset class, sector, and company. Those at the very cheap end include traditional value stocks all over the world, relative to growth stocks. Value stocks have had their worst-ever relative decade ending December 2019, followed by the worst-ever year in 2020, with spreads between Growth and Value performance averaging between 20 and 30 percentage points for the single year! Similarly, Emerging Market equities are at 1 of their 3, more or less co-equal, relative lows against the U.S. of the last 50 years. Not surprisingly, we believe it is in the overlap of these two ideas, Value and Emerging, that your relative bets should go, along with the greatest avoidance of U.S. Growth stocks that your career and business risk will allow.
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DesertInvestor
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Re: Vanguard Emerging markets at 10%

Post by DesertInvestor »

watchnerd wrote: Fri May 07, 2021 6:26 am
Windylotus wrote: Fri May 07, 2021 6:13 am
watchnerd wrote: Wed May 05, 2021 8:57 pm Frontier markets, on the other hand, are about 23% cheaper than EM.
What is considered Frontier markets? Thanks
The countries in the MSCI Frontier Markets index.

https://www.msci.com/documents/10199/f9 ... 0848afe026
7.4% Kazakhstan! I'm good. Borat killed that investment for me.
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DesertInvestor
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Re: Vanguard Emerging markets at 10%

Post by DesertInvestor »

nisiprius wrote: Fri May 07, 2021 7:10 am
Windylotus wrote: Fri May 07, 2021 6:13 am
watchnerd wrote: Wed May 05, 2021 8:57 pm Frontier markets, on the other hand, are about 23% cheaper than EM.
What is considered Frontier markets? Thanks
It's a euphemism. Other commonly used terms that are euphemisms are "emerging markets," "high-yield bonds."

"Emerging markets" means "economically less developed countries." Instead of saying these are countries with less-developed economies, the term suggests that they are all "emerging," on the way up, and destined to become developed markets.

"Frontier markets" means countries whose markets are not even "emerging." Wikipedia says they are sometimes called "pre-emerging markets," but are so far from being developed that they are not likely to be come developed markets any time soon.

I don't know what the justification for the term "frontier" is. Perhaps it means that it is on the extreme outer limits of exploration by bold pioneering investors.

Note that calculating total market size from MSCI indexes, the total cap weight

for MSCI Frontier Markets, 79 constituents x $997.4 million average market cap per constitution = $0.079 trillion.

For emerging markets, 1,391 x 5,292.32 / 85% = $8.7 trillion

For the MSCI ACWI total world, 2,974 x 21,677.67 / 85% = $76 trillion

So frontier markets represent about 0.1% of the total of all global stock markets, and not having them in one's portfolio is not a serious omission. The way they are mentioned in the same breath... developed markets, emerging markets, frontier markets... gives them a mental weight out of proportion to their financial weight.
Excellent.
ivgrivchuck
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Re: Vanguard Emerging markets at 10%

Post by ivgrivchuck »

DesertInvestor wrote: Fri May 07, 2021 11:49 am Downside being you lack the liquidity to rebalance ect. Plus locked up on EE bonds for 20 years. Deciding myself whether to begin contributions in my early 40s.
EE-bonds are highly illiquid and locked for 20 years. Yes, that's a big downside. Upside (compared to 20 year treasuries) is that if the interest rates rise heavily, you can liquidate them without taking a loss.

I-bonds are illiquid for the first year. After that they can be used for rebalancing.
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jginseattle
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Re: Vanguard Emerging markets at 10%

Post by jginseattle »

UpperNwGuy wrote: Wed May 05, 2021 9:59 pm Vanguard's Emerging Markets Stock Index Fund (VEMAX) has the following country allocations:
40.9% China
17.7% Taiwan
12.1% India
5.2% Brazil
4.4% South Africa
3.2% Saudi Arabia
2.8% Russia
13.7% Everybody else

If you're comfortable with tilting towards these countries, go for it. I am not.
Investing is frequently uncomfortable.

On the other hand, personal preference comes into play. if you're not going to stick with an investment through thick and thin then it's best to avoid it.
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Re: Vanguard Emerging markets at 10%

Post by abuss368 »

DesertInvestor wrote: Wed May 05, 2021 8:44 pm Hi,

Based on Jermey Grantham and current emerging market PE compared to US ect thinking about shifting 10% of international to emerging markets (currently 70% US and 30% international with 10% small value tilt). Slightly more complicated portfolio, but just makes me feel a little better continuing to contribute. Wondering how people feel about this?
The market weight of emerging markets is included in Total International Stock. I believe it is approximately 25% of the fund.

Tony
John C. Bogle: “Simplicity is the master key to financial success."
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watchnerd
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Re: Vanguard Emerging markets at 10%

Post by watchnerd »

DesertInvestor wrote: Fri May 07, 2021 12:22 pm
watchnerd wrote: Fri May 07, 2021 6:26 am
Windylotus wrote: Fri May 07, 2021 6:13 am
watchnerd wrote: Wed May 05, 2021 8:57 pm Frontier markets, on the other hand, are about 23% cheaper than EM.
What is considered Frontier markets? Thanks
The countries in the MSCI Frontier Markets index.

https://www.msci.com/documents/10199/f9 ... 0848afe026
7.4% Kazakhstan! I'm good. Borat killed that investment for me.
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UpperNwGuy
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Re: Vanguard Emerging markets at 10%

Post by UpperNwGuy »

jginseattle wrote: Fri May 07, 2021 5:38 pm
UpperNwGuy wrote: Wed May 05, 2021 9:59 pm Vanguard's Emerging Markets Stock Index Fund (VEMAX) has the following country allocations:
40.9% China
17.7% Taiwan
12.1% India
5.2% Brazil
4.4% South Africa
3.2% Saudi Arabia
2.8% Russia
13.7% Everybody else

If you're comfortable with tilting towards these countries, go for it. I am not.
Investing is frequently uncomfortable.

On the other hand, personal preference comes into play. if you're not going to stick with an investment through thick and thin then it's best to avoid it.
Exactly. The way I see it, I have three choices: (a) don't invest at all in authoritarian countries, (b) invest everywhere at market weight, (c) tilt my investments toward authoritarian counties because they might yield higher returns. I've done (a) and (b) at different times in my investing life. I've never done (c), and I never will.
JBTX
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Re: Vanguard Emerging markets at 10%

Post by JBTX »

DesertInvestor wrote: Wed May 05, 2021 8:44 pm Hi,

Based on Jermey Grantham and current emerging market PE compared to US ect thinking about shifting 10% of international to emerging markets (currently 70% US and 30% international with 10% small value tilt). Slightly more complicated portfolio, but just makes me feel a little better continuing to contribute. Wondering how people feel about this?
30% times 10% is only an extra 3% EM tilt. Not going to move the needle much.

I'm 40-45-% international, and approx 20-25% EM, last I checked.

Grantham is mostly hot on EM value.
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Re: Vanguard Emerging markets at 10%

Post by DesertInvestor »

It would be out of the 30% international, so 20% developed market and 10% international. But apparently I'm already almost 8% just with the total int index fund.
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DesertInvestor
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Re: Vanguard Emerging markets at 10%

Post by DesertInvestor »

Emerging markets value? This is like Frontier markets? Probably have to invest in some high expense ratio ETF.
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Re: Vanguard Emerging markets at 10%

Post by retired@50 »

DesertInvestor wrote: Fri May 07, 2021 7:19 pm It would be out of the 30% international, so 20% developed market and 10% international. But apparently I'm already almost 8% just with the total int index fund.
This is what I was trying to get at back up-thread. If you are using a Total International Index fund, then you've already got emerging market exposure at the "market-weight". I don't see any need to tilt toward emerging markets, but if you want to, you could just simply add a small position of an emerging markets fund in your Roth IRA.

Regards,
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Re: Vanguard Emerging markets at 10%

Post by asif408 »

DesertInvestor wrote: Fri May 07, 2021 7:20 pm Emerging markets value? This is like Frontier markets? Probably have to invest in some high expense ratio ETF.
No, they are the same countries as a market cap weighted EM fund, just somewhat different country and sector weightings. You could invest in funds like FNDE or PXH, which are essentially EM value funds (there aren't any pure EM value funds). They have 0.39% and 0.5% ERs, respectively, which are the cheapest in that area. Certainly if you believe the return potential is better there paying 30 or 40 basis points more than a market cap weighted EM index fund is well worth it. If you don't just buy a market cap weighted fund.
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Re: Vanguard Emerging markets at 10%

Post by DesertInvestor »

asif408 wrote: Fri May 07, 2021 9:33 pm
DesertInvestor wrote: Fri May 07, 2021 7:20 pm Emerging markets value? This is like Frontier markets? Probably have to invest in some high expense ratio ETF.
No, they are the same countries as a market cap weighted EM fund, just somewhat different country and sector weightings. You could invest in funds like FNDE or PXH, which are essentially EM value funds (there aren't any pure EM value funds). They have 0.39% and 0.5% ERs, respectively, which are the cheapest in that area. Certainly if you believe the return potential is better there paying 30 or 40 basis points more than a market cap weighted EM index fund is well worth it. If you don't just buy a market cap weighted fund.
FNDE and PXH don't seem dramatically different than vanguard emerging market index. Only thing i can control is fees, so i think I would lean to vanguard index fund if I added anything else to EM (really i would only add another 3% anyway now that I realize 25% allocation in total int fund).
MnD
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Re: Vanguard Emerging markets at 10%

Post by MnD »

Huygens wrote: Wed May 05, 2021 11:21 pm You may already be close to 10% in EM. If you use a Total International ETF like VXUS, 25.70% is allocated to EM. 30% x 25.70% = 7.7% of your total portfolio is in EM today. Will 2.3% make a difference?
1
We're 70/30 with the equity side approximating global market cap and our EM allocation is currently 8.8% of total portfolio.
The great thing about very broad indexing is that you don't have to worry about all these slice and dice concerns and you are participating in everything.
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