Author Topic: Emerging Markets  (Read 20089 times)

WoodsRun

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Emerging Markets
« on: September 14, 2015, 01:09:01 PM »
A couple weeks ago I opened up my first Vanguard account (not counting the funds in my 401(k) as I picked all Vanguard ones.) I've been thinking of getting into emerging markets for a while so I decided to take the plunge today and deposited the first 10,000 into VEMAX (emerging markets, admiral shares). It was between VEMAX and VTSAX.

Is anyone else taking the risk of being exposed to emerging markets? I realize that the fund might go down further in the short term especially with the fed interest rate hike talks this week but over the long term it seems like a really great fund.

The overall P/E ratio as of now seems to be about 12 which is below average so it would be great if it stays that low for a while so they remain cheap to buy.

Does anyone  think this is taking too much risk? At the moment the P/E ratio for emerging markets is much lower than that of VTSAX, so between the two I figured I can start with emerging markets. I don't think that's timing the market, I think that's trying to buy something with greater value in the long term. If someone thinks I'm foolish I'm very open to being proven wrong.

As emerging markets becomes more expensive relative to the US stock market I will start a position in VTSAX.

ShoulderThingThatGoesUp

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Re: Emerging Markets
« Reply #1 on: September 14, 2015, 01:15:30 PM »
I have a little in SCHE, which is similar to VEMAX except run by Schwab. They certainly have higher expense ratios than general domestic index funds. I think there's a persuasive argument that emerging markets have the highest upside. According to "target portfolios" I have too little in foreign stocks, and I'm not sure whether the right move is to put some more into SCHE or just regular SCHF (0.08% ER). I'm interested what the more seasoned investors have to say.

sol

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Re: Emerging Markets
« Reply #2 on: September 14, 2015, 01:25:47 PM »
I'm still buying it.

johnny847

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Re: Emerging Markets
« Reply #3 on: September 14, 2015, 01:43:06 PM »
I implicitly own emerging markets from my holdings of VFWAX (FTSE all world ex US) + VSS (FTSE all world ex US small cap).

But that's in accordance with the appropriate market weighting.

In the past, emerging markets has been riskier but also more rewarding. Will this be true going forward? Quite possibly. But would I put all of my taxable account in it? No.

I don't believe in tilting certain sectors/countries/however else you want to divide it of the global stock market. Maybe the tilt you choose will be a winner. Maybe it won't. I don't pretend to know. I'm pretty sure most others don't know either. I'd rather guarantee myself the average global stock market return (less Vanguard's minimal fees), for better or worse.
I also don't believe that truly assessing risk can be done with just one metric, no matter what the metric. The stock market is far more complicated than that.

LAGuy

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Re: Emerging Markets
« Reply #4 on: September 14, 2015, 02:51:17 PM »
I own a very small amount in an emerging market fund in a 401k. It's done pretty terribly over the last couple years, as have all international stocks really. The emerging market slowdown combined with a stronger dollar has really wrecked havoc on these funds. Perhaps they're due for a turn around, but then people have been saying that about bond yields for years now. Personally I plan to just stick to an allocation of VTIAX (Vanguard Total International Stock Index) once I roll the fund over.

My own prognostication is that the US markets have been way undervalued compared to international equity for a long time. I mean, perhaps all stocks are overvalued, but my belief is that the US has suffered for a long time compared to the glory of the BRIC's or the Euro, or China rising or whatever. I'm not some America cheerleader, but I was around for the 80's and remember the story about how Japan was going to take over the economic world and how did that turn out? I think the current situation of a rebounding America combined with trouble abroad still has some time to run...keep in mind the Euro opened trade at around 80 US cents to the Euro dollar. That relationship quickly inverted and just recently have we seen things swing back the other direction. I mean, the Euro is a basket case! I don't see why it can't go back to that 80 cent range.

GGNoob

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Re: Emerging Markets
« Reply #5 on: September 14, 2015, 02:58:54 PM »
My portfolio is 20% VWO (Emerging Markets Index) with about another 3.4% emerging markets from VSS (All-World Ex-US Small-Cap).

NorCal

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Re: Emerging Markets
« Reply #6 on: September 14, 2015, 03:10:06 PM »
I maintain a decent chunk of my foreign equities in Emerging Markets.  Don't worry too much about valuations, multiples, interest rates, and currency.  No one can really predict that stuff.

I hold SCHE (the Schwab version of the Vanguard fund), as well as some EWEM (An emerging markets fund that equal-weights the various countries) and FRN (A Frontier Markets fund).

Expense ratios will always be higher on harder to access markets.  The question is whether the added diversification and potential returns are worth the extra cost.  I personally think it is worth the cost.

I generally weight my equities at 70% domestic, 30% international.  About a third of my international funds go towards emerging/frontier markets.

samuck

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Re: Emerging Markets
« Reply #7 on: September 14, 2015, 03:18:07 PM »
I overweigh emerging markets by 10% with Vanguard FTSE Emerging Markets ETF, so I bought some more just recently to rebalance. Would not bet everything on EM, but it seems quite likely they will support growth in my portfolio.

seattlecyclone

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Re: Emerging Markets
« Reply #8 on: September 14, 2015, 03:21:25 PM »
My portfolio is 5% emerging markets (plus whatever is already in the "all world" funds). It is a bit of a risk, but I think there are good reasons to expect these other countries will outperform the US as their economies develop more.

milesdividendmd

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Re: Emerging Markets
« Reply #9 on: September 14, 2015, 04:27:47 PM »
The correct answer is to figure out how much EM exposure/risk you want in your portfolio, and then stick to that amount through thick and thin.  Your opinion should be utterly irrelevant if you are a buy and holder.

But if you are the active type and thing that EM could be a screaming buy if the Fed raises rates on thursday, then at least you are in good company!

http://finance.yahoo.com/news/allianzs-el-erian-bumpy-road-140511091.html

milesdividendmd

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Re: Emerging Markets
« Reply #10 on: September 14, 2015, 04:28:45 PM »
I'm still buying it.

Meaning what?  It's part of your automatic allocation to your retirement accounts?

sol

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Re: Emerging Markets
« Reply #11 on: September 14, 2015, 04:47:27 PM »
I'm still buying it.

Meaning what?  It's part of your automatic allocation to your retirement accounts?
 

Technically it's in my taxable account, but yes.  I'm still making the same regular steady purchases regardless of how I feel about future potential returns, because I believe in a globally diversified indexing strategy.

It would take something pretty extraordinary to get me to stop buying an entire asset class.  Correction, "to sell out of an entire asset class."  I stop buying stuff frequently as a means of rebalancing.

Emerging markets are down right now, so I'm buying a little more than usual until I'm rebalanced.  I'm kind of slow with the rebalancing, as I try to do it with extra funds rather than reducing my allocations elsewhere.

How about you, miles? Are you invested in emerging markets right now?

milesdividendmd

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Re: Emerging Markets
« Reply #12 on: September 14, 2015, 04:55:25 PM »
Only in my taxable. And that's the same story as you, only with Betterment.  (I've harvested a lot of tax losses from EM in the past year.)

As you know in my retirement accounts I've been 100% short term treasuries since 9/1/15, (With the exception of my and my wife's Roths which use 12 months as a look back and are 100% in long term treasuries and health care (DMSR), respectively.

forummm

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Re: Emerging Markets
« Reply #13 on: September 14, 2015, 05:26:52 PM »
OP, just be aware that EM are MUCH more volatile than VTSAX. IIRC, VEMAX went down 50% 2 years in a row. And it also went up 70% in a year. It's all over the place. I have some as part of a globally cap-weighted portfolio. Just don't panic when it loses 5% every day for awhile. And don't put all your money in it. If you buy VTSAX and VTIAX, you'll be globally balanced. VTIAX has EM inside it already and cap-weighted for international stocks.

WoodsRun

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Re: Emerging Markets
« Reply #14 on: September 14, 2015, 07:05:59 PM »
I would like to think that I'm prepared to handle the volatility but only time will tell.


But if you are the active type and thing that EM could be a screaming buy if the Fed raises rates on thursday, then at least you are in good company!

http://finance.yahoo.com/news/allianzs-el-erian-bumpy-road-140511091.html

What I got from that yahoo article is that there will be a buying opportunity after the fed rate hike. I guess I got in too early lol. But I do plan to keep this fund indefinitely. After a little while I will start a position in VTSAX and maybe a developed world market fund (if Vanguard has one, I did not yet check).

milesdividendmd

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Re: Emerging Markets
« Reply #15 on: September 14, 2015, 07:27:06 PM »

I would like to think that I'm prepared to handle the volatility but only time will tell.


But if you are the active type and thing that EM could be a screaming buy if the Fed raises rates on thursday, then at least you are in good company!

http://finance.yahoo.com/news/allianzs-el-erian-bumpy-road-140511091.html

What I got from that yahoo article is that there will be a buying opportunity after the fed rate hike. I guess I got in too early lol. But I do plan to keep this fund indefinitely. After a little while I will start a position in VTSAX and maybe a developed world market fund (if Vanguard has one, I did not yet check).

If you want to buy and hold you should figure out what you want your overall asset allocation to be and then invest according to that allocation as soon as possible.

What happens next week, next month, or next year really won't  matter that much.

That being said, there's plenty of evidence buying cheap stocks is a smart bet over long time horizons. So having a healthy exposure to emerging markets, which are much cheaper than the US market now, is certainly defensible. 

The key is to stick to your plan. That's why thinking deeply about your plan is a good investment of your time.


RichMoose

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Re: Emerging Markets
« Reply #16 on: September 14, 2015, 08:34:18 PM »
I have a small part of my portfolio in EM. A little less than 10% now that it has fallen in the past few months. I like the long term outlook of investing in countries with hard-working, young population bases that have a lot of growth ahead of them just to reach a "middle-class" standard of living.

Mr FrugalNL

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Re: Emerging Markets
« Reply #17 on: September 14, 2015, 11:36:31 PM »
In the past, emerging markets has been riskier but also more rewarding. Will this be true going forward? Quite possibly. But would I put all of my taxable account in it? No.

I don't believe in tilting certain sectors/countries/however else you want to divide it of the global stock market. Maybe the tilt you choose will be a winner. Maybe it won't. I don't pretend to know. I'm pretty sure most others don't know either. I'd rather guarantee myself the average global stock market return (less Vanguard's minimal fees), for better or worse.
I also don't believe that truly assessing risk can be done with just one metric, no matter what the metric. The stock market is far more complicated than that.

This describes my investment approach to a tee. I invest in emerging markets (and developed markets!) via Vanguard FTSE all-world UCITS ETF. Aside from the benefit of Keeping It Simple, it means I have no rebalancing to do within the equity portion of my portfolio. This is a big advantage because of my broker's somewhat high transaction fees.

johnny847

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Re: Emerging Markets
« Reply #18 on: September 15, 2015, 08:11:25 AM »
In the past, emerging markets has been riskier but also more rewarding. Will this be true going forward? Quite possibly. But would I put all of my taxable account in it? No.

I don't believe in tilting certain sectors/countries/however else you want to divide it of the global stock market. Maybe the tilt you choose will be a winner. Maybe it won't. I don't pretend to know. I'm pretty sure most others don't know either. I'd rather guarantee myself the average global stock market return (less Vanguard's minimal fees), for better or worse.
I also don't believe that truly assessing risk can be done with just one metric, no matter what the metric. The stock market is far more complicated than that.

This describes my investment approach to a tee. I invest in emerging markets (and developed markets!) via Vanguard FTSE all-world UCITS ETF. Aside from the benefit of Keeping It Simple, it means I have no rebalancing to do within the equity portion of my portfolio. This is a big advantage because of my broker's somewhat high transaction fees.

I was about to say that you're missing out on tax loss harvesting (TLH) opportunities but then I noticed you're from the Netherlands, so I don't even know if the tax laws there allow for it. And you have high transaction fees.

But for the benefit of Americans here, I will say the following:
Disadvantages of using all world funds:
A) Can't TLH US and international portions separately. It's decently common to have international funds reporting losses and US funds reporting gains (or vice versa)
B) The all world fund from Vanguard has a slightly higher expense ratio than a market weighted combination of Vanguard's total US + total international. This is Vanguard specific, but it may be true of other mutual fund companies - take a look and see
C) You may pay higher taxes on your all world fund vs a US + international fund. The optimal place to put a fund holding international stocks is not as simple as put it in taxable because otherwise you can't get the foreign tax credit. For a deeper explanation, see my post in the US tax guide. You will see that the inability to separate the international and US portions hurts you.

Advantages of using all world funds (as mentioned by Mr FrugalNL)
A) Simple. No need to rebalance between US and international stocks.
B) Less rebalancing needs also means lower transaction costs (though largely irrelevant if you hold the mutual fund versions, because you can trade these for free (usually -  if you choose the right brokerage and a non load fund))

Of course, everybody needs to decide for themselves whether the advantages outweigh the disadvantages here.

Mr FrugalNL

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Re: Emerging Markets
« Reply #19 on: September 15, 2015, 09:07:46 AM »
I only have a vague idea of what tax loss harvesting is, but I do know it's not possible under Dutch tax law. So yeah, didn't factor that into my plans at all.

Scandium

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Re: Emerging Markets
« Reply #20 on: September 15, 2015, 11:10:30 AM »
I do, whatever percentage is in VTIAX. I believe it's 5-10% or so? My AA is 40% in foreign so no more than 4% in EE. I think a market weight allocation to EE is ok, I don't see a reason to do more. I note how "everyone" says emerging has more upside, so then isn't it priced in already..?

GGNoob

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Re: Emerging Markets
« Reply #21 on: September 15, 2015, 11:25:07 AM »
I do, whatever percentage is in VTIAX. I believe it's 5-10% or so? My AA is 40% in foreign so no more than 4% in EE. I think a market weight allocation to EE is ok, I don't see a reason to do more. I note how "everyone" says emerging has more upside, so then isn't it priced in already..?

Most total international funds are around 18% emerging markets. In your case, VTIAX is 17.7%.

I've never gotten the comment of "isn't it priced in already?" If everything was priced in, there'd be no reason to buy stocks.

I'd hate to have been the idiot in 2002 that said "I don't want to invest in emerging markets, their upside is already priced in" and then have emerging markets shoot up 58% in 2003.


johnny847

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Re: Emerging Markets
« Reply #22 on: September 15, 2015, 11:28:08 AM »
I do, whatever percentage is in VTIAX. I believe it's 5-10% or so? My AA is 40% in foreign so no more than 4% in EE. I think a market weight allocation to EE is ok, I don't see a reason to do more. I note how "everyone" says emerging has more upside, so then isn't it priced in already..?

If you believe in an efficient market (I do), then it is already priced in. But emerging markets also has more downside - more risk. This isn't contradicting the efficient market hypothesis.

Scandium

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Re: Emerging Markets
« Reply #23 on: September 15, 2015, 11:38:29 AM »
I do, whatever percentage is in VTIAX. I believe it's 5-10% or so? My AA is 40% in foreign so no more than 4% in EE. I think a market weight allocation to EE is ok, I don't see a reason to do more. I note how "everyone" says emerging has more upside, so then isn't it priced in already..?

Most total international funds are around 18% emerging markets. In your case, VTIAX is 17.7%.

I've never gotten the comment of "isn't it priced in already?" If everything was priced in, there'd be no reason to buy stocks.

I'd hate to have been the idiot in 2002 that said "I don't want to invest in emerging markets, their upside is already priced in" and then have emerging markets shoot up 58% in 2003.


Ok, thanks. I was too lazy to check morningstar. Which says VTIAX is 14%. Not sure why it's different, but whatever.

My point was that if it's a certainty it would be priced in. It's only uncertain things that aren't priced in, but that can mean both up or down. With an end to the commodity boom, an emerging markets borrowing binge (many in USD) and coming higher rates, maybe we're on the cusp of a lost decade in emerging markets? Who knows. If the markets are willing to pay a lower P/E for EE shares, then I'm inclined to believe there's a reason for that (Yes probably because they are higher risk, and other reasons). So I just buy the market weighted ratio (ish), nothing more, nothing less.

I guess you could say I usually believe the market know something I don't, rather than thinking I know something the market doesn't..
« Last Edit: September 15, 2015, 11:40:04 AM by Scandium »

GGNoob

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Re: Emerging Markets
« Reply #24 on: September 15, 2015, 11:50:25 AM »
Makes sense.

I guess you could say I usually believe the market knows something I don't, rather than thinking I know something the market doesn't.

Great way to look at it. The market definitely knows more than I do!

milesdividendmd

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Emerging Markets
« Reply #25 on: September 15, 2015, 12:05:21 PM »
The strong efficient market argument is so obviously flawed that it's ridiculous.

Risk stories for momentum are particularly comical, but the value anomaly is also quite unconvincing as a pure risk story.

And not believing in efficient markets in no way means that it is easy to beat the market, (or that one thinks they are smarter than the market) because there are the costs associated with arbitrage, and behavioral risks to overcome.
« Last Edit: September 15, 2015, 12:22:27 PM by milesdividendmd »

Radagast

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Re: Emerging Markets
« Reply #26 on: September 15, 2015, 09:15:47 PM »
I like emerging markets as an investment, especially for just starting out. I have thought that if I was creating a portfolio of Admiral shares in lumps of $10,000 my first addition would definitely be VEMAX. And I also feel they are underpriced right now.

A few things I like (roughly in order I realized as I finished):
-High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame.
-High volatility and relatively low correlation lead to lots of buying chances when rebalancing
-Geographical diversification: I was doing a mental risk guesstimate and decided that many of the biggest (though generally less likely) risks would be geographically limited; therefore I deliberately tried to spread my stocks around the globe to a certain degree.
-It seems like there is more of a chance for them to be mispriced, for example if a scare in one country pushes people out of all emerging market countries even though they have little else in common (Poland, South Africa, South Korea, Mexico, China, Romania, Brazil, Russia... not much in common there...)

johnny847

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Re: Emerging Markets
« Reply #27 on: September 15, 2015, 09:21:16 PM »
High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame.

No, volatility is never a desirable trait. High returns is. Of course, oftentimes high volatility accompanies high returns. But just because you have high volatility doesn't mean you'll have high returns.

-High volatility and relatively low correlation lead to lots of buying chances when rebalancing
Again, you should be concerned about returns, not volatility. A high volatile asset with a long term return of zero means a lot of rebalancing opportunity sure but that doesn't help you one bit.

milesdividendmd

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Re: Emerging Markets
« Reply #28 on: September 15, 2015, 09:34:57 PM »

High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame.

No, volatility is never a desirable trait. High returns is. Of course, oftentimes high volatility accompanies high returns. But just because you have high volatility doesn't mean you'll have high returns.

-High volatility and relatively low correlation lead to lots of buying chances when rebalancing
Again, you should be concerned about returns, not volatility. A high volatile asset with a long term return of zero means a lot of rebalancing opportunity sure but that doesn't help you one bit.

I would state it more strongly.

Volatility in and of itself is actually an undesirable quality, both because it eats away at CAGR (the only return that matters) and because low volatility equities are associated with higher than average returns (and vice versa).

nobodyspecial

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Re: Emerging Markets
« Reply #29 on: September 15, 2015, 10:24:43 PM »
Makes sense.

I guess you could say I usually believe the market knows something I don't, rather than thinking I know something the market doesn't.

Great way to look at it. The market definitely knows more than I do!
But the market doesn't necessarily have the same goals as you.
Somebody looking for an average 8% return over the next 30-40 years has a different best strategy than a trader looking to make the maximum profit in the next hour but willing to take any risk with somebody else's money or a fund manager constrained by asset classes and tax considerations.

Radagast

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Re: Emerging Markets
« Reply #30 on: September 15, 2015, 10:34:51 PM »

High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame.

No, volatility is never a desirable trait. High returns is. Of course, oftentimes high volatility accompanies high returns. But just because you have high volatility doesn't mean you'll have high returns.

-High volatility and relatively low correlation lead to lots of buying chances when rebalancing
Again, you should be concerned about returns, not volatility. A high volatile asset with a long term return of zero means a lot of rebalancing opportunity sure but that doesn't help you one bit.

I would state it more strongly.

Volatility in and of itself is actually an undesirable quality, both because it eats away at CAGR (the only return that matters) and because low volatility equities are associated with higher than average returns (and vice versa).
Now this may sound simplistic, however I am currently looking at "The Four Pillars of Investing" by William Bernstein, page 283. An investment fluctuates between $5, $10, and $15 over the course of three months. An investor purchases $100 every month, thus buying 20, 10, and 6.67 shares at those prices, and ending with 36.67 shares at an average value of $10 each. However, they were purchased at an average price of $8.18. The investor ends with $366.67 at average prices, whereas the same amount invested into a perfectly non-volatile investment at the same average price comes out to only $300.

Increasing the monthly fluctuation to $1, 10, and $19 results in the investor owning 115.26 shares, purchased at an average price of $2.60, and worth an average of $1,152.63. This is still with an average price of $10.

So... volatility looks beneficial to me in this situation. It seems like this method would even generate wealth with a highly volatile non-returning asset like gold. Of course the opposite would be true if you were selling, in which case volatility would be very bad.

johnny847

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Re: Emerging Markets
« Reply #31 on: September 15, 2015, 10:41:06 PM »

High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame.

No, volatility is never a desirable trait. High returns is. Of course, oftentimes high volatility accompanies high returns. But just because you have high volatility doesn't mean you'll have high returns.

-High volatility and relatively low correlation lead to lots of buying chances when rebalancing
Again, you should be concerned about returns, not volatility. A high volatile asset with a long term return of zero means a lot of rebalancing opportunity sure but that doesn't help you one bit.

I would state it more strongly.

Volatility in and of itself is actually an undesirable quality, both because it eats away at CAGR (the only return that matters) and because low volatility equities are associated with higher than average returns (and vice versa).
Now this may sound simplistic, however I am currently looking at "The Four Pillars of Investing" by William Bernstein, page 283. An investment fluctuates between $5, $10, and $15 over the course of three months. An investor purchases $100 every month, thus buying 20, 10, and 6.67 shares at those prices, and ending with 36.67 shares at an average value of $10 each. However, they were purchased at an average price of $8.18. The investor ends with $366.67 at average prices, whereas the same amount invested into a perfectly non-volatile investment at the same average price comes out to only $300.

Increasing the monthly fluctuation to $1, 10, and $19 results in the investor owning 115.26 shares, purchased at an average price of $2.60, and worth an average of $1,152.63. This is still with an average price of $10.

So... volatility looks beneficial to me in this situation. It seems like this method would even generate wealth with a highly volatile non-returning asset like gold. Of course the opposite would be true if you were selling, in which case volatility would be very bad.

Ok. Suppose this investment never appreciates. It constantly only ever fluctuates between $15 and $5, for a long term average return of 0%.

Meanwhile, Joe Shmo invests in VTSAX and gets the US market return. Something like 8-12% CAGR nominally depending on the time period you're looking at (I could be wrong with these numbers, but that's not the point here really).


Again, volatility isn't what you're after. High long term returns for an acceptable (whatever acceptable means to you) amount of risk is what you're after.  A volatile investment doesn't mean it will have high returns.

sol

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Re: Emerging Markets
« Reply #32 on: September 15, 2015, 10:56:09 PM »
A volatile investment doesn't mean it will have high returns.

Conceptually?  No.  Practically?  It kind of does. 

This is the premise of the efficient market hypothesis.  Returns are inversely proportional to risk and liquidity.  Ideally, an investment with higher volatility should offer higher returns to compensate for the risk.  Otherwise why would anyone buy it?

johnny847

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Re: Emerging Markets
« Reply #33 on: September 15, 2015, 11:09:56 PM »
A volatile investment doesn't mean it will have high returns.

Conceptually?  No.  Practically?  It kind of does. 

This is the premise of the efficient market hypothesis.  Returns are inversely proportional to risk and liquidity.  Ideally, an investment with higher volatility should offer higher returns to compensate for the risk.  Otherwise why would anyone buy it?

Sure practically high volatility is correlated with high returns. But that's not thee point. Raven15 has demonstrated that he or she is misconstruing on a conceptual level how the implication works by bringing up a hypothetical example in an attempt to illustrate the concept.

milesdividendmd

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Re: Emerging Markets
« Reply #34 on: September 15, 2015, 11:23:02 PM »

A volatile investment doesn't mean it will have high returns.

Conceptually?  No.  Practically?  It kind of does. 

This is the premise of the efficient market hypothesis.  Returns are inversely proportional to risk and liquidity.  Ideally, an investment with higher volatility should offer higher returns to compensate for the risk.  Otherwise why would anyone buy it?

Practically it absolutely does not. how can you square your statement with the low volatility anomaly?

The low volatility anomaly is pervasive and it demonstrates an inverse correlation of volatility with risk adjusted returns.

There's the efficient market hypothesis, (in its purest form the debunked capital asset pricing model that states that risk and Beta are directly related,) and then there is reality.

Radagast

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Re: Emerging Markets
« Reply #35 on: September 15, 2015, 11:41:32 PM »
Now this may sound simplistic, however I am currently looking at "The Four Pillars of Investing" by William Bernstein, page 283. An investment fluctuates between $5, $10, and $15 over the course of three months. An investor purchases $100 every month, thus buying 20, 10, and 6.67 shares at those prices, and ending with 36.67 shares at an average value of $10 each. However, they were purchased at an average price of $8.18. The investor ends with $366.67 at average prices, whereas the same amount invested into a perfectly non-volatile investment at the same average price comes out to only $300.

Increasing the monthly fluctuation to $1, 10, and $19 results in the investor owning 115.26 shares, purchased at an average price of $2.60, and worth an average of $1,152.63. This is still with an average price of $10.

So... volatility looks beneficial to me in this situation. It seems like this method would even generate wealth with a highly volatile non-returning asset like gold. Of course the opposite would be true if you were selling, in which case volatility would be very bad.

Ok. Suppose this investment never appreciates. It constantly only ever fluctuates between $15 and $5, for a long term average return of 0%.

Meanwhile, Joe Shmo invests in VTSAX and gets the US market return. Something like 8-12% CAGR nominally depending on the time period you're looking at (I could be wrong with these numbers, but that's not the point here really).


Again, volatility isn't what you're after. High long term returns for an acceptable (whatever acceptable means to you) amount of risk is what you're after.  A volatile investment doesn't mean it will have high returns.
Below is another simplistic demonstration. One investor places $100 per month in a volatile asset with 0 return that fluctuates between $7, $10, and $13. The other does the same in an investment that fluctuates between $9, $10, and $11 and additionally returns 1% compounded per month. The more volatile asset with 0 return still comes out fractionally ahead of the compounding asset! And that is with 0 returns. Now as Sol just said, volatility more generally tends to go together with higher returns. In conclusion, volatility is the friend of an investor who is dollar cost averaging from a starting point of 0. It is the enemy of a person selling a fixed dollar amount every month. That is (I assume) why the glide path concept exists, and also why I say emerging markets could be a good investment to start with (behavioral considerations aside).

Now, don't make me show you how three volatile non-correlated assets with 0 return can generate a positive return through rebalancing (actually I am not inclined, so don't worry).

Volatile No Return         
Investment   $/share   # Purchased   Accumlated $
 $100.00     $7.00     14.29     $142.86
 $100.00     $10.00     10.00     $242.86
 $100.00     $13.00     7.69     $319.78
 $100.00     $7.00     14.29     $462.64
 $100.00     $10.00     10.00     $562.64
 $100.00     $13.00     7.69     $639.56
 $100.00     $7.00     14.29     $782.42
 $100.00     $10.00     10.00     $882.42
 $100.00     $13.00     7.69     $959.34
 $100.00     $7.00     14.29     $1,102.20
 $100.00     $10.00     10.00     $1,202.20
 $100.00     $13.00     7.69     $1,279.12
Ending Shares       127.91    
Ending Value       $1,279.12    
         
Less Volatile, but 1% Return Per Month         
Investment   $/share   # Purchased   Accumlated $
 $100.00     $9.00     11.11     $111.11
 $100.00     $10.00     10.00     $212.22
 $100.00     $11.00     9.09     $305.25
 $100.00     $9.00     11.11     $419.42
 $100.00     $10.00     10.00     $523.61
 $100.00     $11.00     9.09     $619.76
 $100.00     $9.00     11.11     $737.07
 $100.00     $10.00     10.00     $844.44
 $100.00     $11.00     9.09     $943.79
 $100.00     $9.00     11.11     $1,064.34
 $100.00     $10.00     10.00     $1,174.98
 $100.00     $11.00     9.09     $1,277.64
Ending Shares       120.81    
Ending Value       $1,277.64    

Radagast

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Re: Emerging Markets
« Reply #36 on: September 15, 2015, 11:45:32 PM »

A volatile investment doesn't mean it will have high returns.

Conceptually?  No.  Practically?  It kind of does. 

This is the premise of the efficient market hypothesis.  Returns are inversely proportional to risk and liquidity.  Ideally, an investment with higher volatility should offer higher returns to compensate for the risk.  Otherwise why would anyone buy it?
The low volatility anomaly is pervasive and it demonstrates an inverse correlation of volatility with risk adjusted returns.
"Risk adjusted" as a prefix completely changes the meaning of "returns".

Radagast

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Re: Emerging Markets
« Reply #37 on: September 16, 2015, 12:13:07 AM »
Sure practically high volatility is correlated with high returns. But that's not thee point. Raven15 has demonstrated that he or she is misconstruing on a conceptual level how the implication works by bringing up a hypothetical example in an attempt to illustrate the concept.
Not only is my concept sound, but it is actually a double whammy in favor of a more volatile asset if it also has the hoped-for higher returns (and you are starting at 0 and dollar cost averaging), per the above. However you will need to "glide" out of it over time, because volatility will gradually and unpredictably become the enemy.

milesdividendmd

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Re: Emerging Markets
« Reply #38 on: September 16, 2015, 12:21:01 AM »
Higher returns are great. Higher volatility is not. That being said higher volatility of non correlated assets can be great within a portfolio because in combination they lower overall portfolio volatility.

Higher returns are not everything. If you are risking big losses for small expected gains in returns you are decreasing your ultimate chance of success.

Otherwise the smart money would all be in leveraged ETFs. (Hint: it's not).

Radagast

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Re: Emerging Markets
« Reply #39 on: September 16, 2015, 12:31:05 AM »
Higher returns are great. Higher volatility is not.*
*Unless you are dollar cost averaging and your regular contributions are still large compared to the amount previously invested. And you have a glide path out. Specific circumstances may vary.

(Let's see if I agree with me tomorrow.)

milesdividendmd

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Re: Emerging Markets
« Reply #40 on: September 16, 2015, 12:58:51 AM »

Higher returns are great. Higher volatility is not.*
*Unless you are dollar cost averaging and your regular contributions are still large compared to the amount previously invested. And you have a glide path out. Specific circumstances may vary.

(Let's see if I agree with me tomorrow.)

DCM is a losing proposition more often then not. It's just a way to deal with the avoidance of the regret associated with being unlucky with your timing.

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Re: Emerging Markets
« Reply #41 on: September 16, 2015, 07:35:39 AM »
Does anyone really think that emerging markets will return 0% over the long term? I do not think emerging markets are risky because they are volatile, I think it is the other way around. Emerging markets are volatile because they are inherently risky due to their less stable political, social, and economical environments.

If someone plans to hold on to an emerging markets index over the long term (measured in decades) there is a lot of potential upside (barring some sort of world wide catastrophe). I definitely would not buy into emerging markets only to play with its volatility. I bought into it because I am positive that their economies will become more advanced in the coming decades.

Also, I feel the US stock market has become more risky over the last 20 years. We've had crashes of about 50% twice in the last 2 decades. Has that ever happened before besides the crash of 1929? So I think the difference in risk between emerging markets and the US stock market is overestimated.

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Re: Emerging Markets
« Reply #42 on: September 16, 2015, 07:44:33 AM »
Now this may sound simplistic, however I am currently looking at "The Four Pillars of Investing" by William Bernstein, page 283. An investment fluctuates between $5, $10, and $15 over the course of three months. An investor purchases $100 every month, thus buying 20, 10, and 6.67 shares at those prices, and ending with 36.67 shares at an average value of $10 each. However, they were purchased at an average price of $8.18. The investor ends with $366.67 at average prices, whereas the same amount invested into a perfectly non-volatile investment at the same average price comes out to only $300.

Increasing the monthly fluctuation to $1, 10, and $19 results in the investor owning 115.26 shares, purchased at an average price of $2.60, and worth an average of $1,152.63. This is still with an average price of $10.

So... volatility looks beneficial to me in this situation. It seems like this method would even generate wealth with a highly volatile non-returning asset like gold. Of course the opposite would be true if you were selling, in which case volatility would be very bad.

Ok. Suppose this investment never appreciates. It constantly only ever fluctuates between $15 and $5, for a long term average return of 0%.

Meanwhile, Joe Shmo invests in VTSAX and gets the US market return. Something like 8-12% CAGR nominally depending on the time period you're looking at (I could be wrong with these numbers, but that's not the point here really).


Again, volatility isn't what you're after. High long term returns for an acceptable (whatever acceptable means to you) amount of risk is what you're after.  A volatile investment doesn't mean it will have high returns.
Below is another simplistic demonstration. One investor places $100 per month in a volatile asset with 0 return that fluctuates between $7, $10, and $13. The other does the same in an investment that fluctuates between $9, $10, and $11 and additionally returns 1% compounded per month. The more volatile asset with 0 return still comes out fractionally ahead of the compounding asset! And that is with 0 returns. Now as Sol just said, volatility more generally tends to go together with higher returns. In conclusion, volatility is the friend of an investor who is dollar cost averaging from a starting point of 0. It is the enemy of a person selling a fixed dollar amount every month. That is (I assume) why the glide path concept exists, and also why I say emerging markets could be a good investment to start with (behavioral considerations aside).

Now, don't make me show you how three volatile non-correlated assets with 0 return can generate a positive return through rebalancing (actually I am not inclined, so don't worry).

Volatile No Return         
Investment   $/share   # Purchased   Accumlated $
 $100.00     $7.00     14.29     $142.86
 $100.00     $10.00     10.00     $242.86
 $100.00     $13.00     7.69     $319.78
 $100.00     $7.00     14.29     $462.64
 $100.00     $10.00     10.00     $562.64
 $100.00     $13.00     7.69     $639.56
 $100.00     $7.00     14.29     $782.42
 $100.00     $10.00     10.00     $882.42
 $100.00     $13.00     7.69     $959.34
 $100.00     $7.00     14.29     $1,102.20
 $100.00     $10.00     10.00     $1,202.20
 $100.00     $13.00     7.69     $1,279.12
Ending Shares       127.91    
Ending Value       $1,279.12    
         
Less Volatile, but 1% Return Per Month         
Investment   $/share   # Purchased   Accumlated $
 $100.00     $9.00     11.11     $111.11
 $100.00     $10.00     10.00     $212.22
 $100.00     $11.00     9.09     $305.25
 $100.00     $9.00     11.11     $419.42
 $100.00     $10.00     10.00     $523.61
 $100.00     $11.00     9.09     $619.76
 $100.00     $9.00     11.11     $737.07
 $100.00     $10.00     10.00     $844.44
 $100.00     $11.00     9.09     $943.79
 $100.00     $9.00     11.11     $1,064.34
 $100.00     $10.00     10.00     $1,174.98
 $100.00     $11.00     9.09     $1,277.64
Ending Shares       120.81    
Ending Value       $1,277.64    


And I can construct the example below where volatility is shown not to be a desirable characteristic. You can construct as many examples as you want raven15, but your absolutely statement that "High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame." only needs one counterexample to be proven false.


Mutual fund A returns 5% a year.

Mutual fund B fluctuates between $5, $10, and $15 a share. In always spends 4 months of the year in each of the 3 prices, but it's random so you don't know which months will have which prices.

Both are currently priced at $10/share.

What do you have after 30 years if you invest $10/month?

Mutual fund A, with the help of an investment calculator $7976.98.

Mutual fund B:
Four months of the year you buy 2 shares at $5/share.
Four months of the year you buy 1 share at $10/share.
Four months of the year you buy 0.667 shares at $15/share.

So each year you buy 14.667 shares. In 30 years, you have 440 shares.
Even if you sold all of them at $15/share you only have $6600 which is less than what mutual fund A is worth.

johnny847

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Re: Emerging Markets
« Reply #43 on: September 16, 2015, 07:48:25 AM »
Does anyone really think that emerging markets will return 0% over the long term? I do not think emerging markets are risky because they are volatile, I think it is the other way around. Emerging markets are volatile because they are inherently risky due to their less stable political, social, and economical environments.

I doubt anybody thinks that emerging markets will return 0% in the long term. It's just an example to try to show raven15 that volatility is not a desirable trait.

I definitely would not buy into emerging markets only to play with its volatility. I bought into it because I am positive that their economies will become more advanced in the coming decades.

This is the same idea I (and if I may speak for milesdividendmd) and milesdividend are trying to convey. Volatility isn't desirable. The high returns are.

brooklynguy

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Re: Emerging Markets
« Reply #44 on: September 16, 2015, 08:29:17 AM »
Higher returns are great. Higher volatility is not.*
*Unless you are dollar cost averaging and your regular contributions are still large compared to the amount previously invested. And you have a glide path out. Specific circumstances may vary.

(Let's see if I agree with me tomorrow.)

DCM is a losing proposition more often then not. It's just a way to deal with the avoidance of the regret associated with being unlucky with your timing.

Dollar cost averaging (as described by Raven) is how almost every accumulator must, by necessity, invest if they wish to avoid the pitfalls of dollar cost averaging (as you are using the term).  That is, most accumulators earn money in small chunks over time (according to a regular payroll schedule, in the case of salaried employees), so if they throw their money into the market as soon as they get their hands on it, they're "dollar cost averaging" over time (and, as Raven said, they therefore often benefit from the market's volatility).

You can construct as many examples as you want raven15, but your absolutely statement that "High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame." only needs one counterexample to be proven false.

As does your absolute statement that:

volatility is never a desirable trait.

which Raven has already disproved with his single counterexample.

The point that Raven actually made (that volatility can be a good thing for accumulators) is sound.

johnny847

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Re: Emerging Markets
« Reply #45 on: September 16, 2015, 08:52:32 AM »
Higher returns are great. Higher volatility is not.*
*Unless you are dollar cost averaging and your regular contributions are still large compared to the amount previously invested. And you have a glide path out. Specific circumstances may vary.

(Let's see if I agree with me tomorrow.)

DCM is a losing proposition more often then not. It's just a way to deal with the avoidance of the regret associated with being unlucky with your timing.

Dollar cost averaging (as described by Raven) is how almost every accumulator must, by necessity, invest if they wish to avoid the pitfalls of dollar cost averaging (as you are using the term).  That is, most accumulators earn money in small chunks over time (according to a regular payroll schedule, in the case of salaried employees), so if they throw their money into the market as soon as they get their hands on it, they're "dollar cost averaging" over time (and, as Raven said, they therefore often benefit from the market's volatility).

You can construct as many examples as you want raven15, but your absolutely statement that "High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame." only needs one counterexample to be proven false.

As does your absolute statement that:

volatility is never a desirable trait.

which Raven has already disproved with his single counterexample.

The point that Raven actually made (that volatility can be a good thing for accumulators) is sound.

So let me get this straight brooklynguy. You're saying that volatility is a desirable trait. Without taking into account any returns.

So you'd rather have a volatile asset with a long term return of zero as opposed to a nonvolatile asset with a constant positive rate of return?

seattlecyclone

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Re: Emerging Markets
« Reply #46 on: September 16, 2015, 09:02:21 AM »
A volatile fund that returns 0% is worse than a nonvolatile asset with a positive return rate, and I don't think brooklynguy was trying to imply otherwise.

If you have two funds that both return 5% over the long run, the more volatile one can be better for those of us who invest a little bit of new money every month, precisely because of the effect that raven15 mentioned earlier: you buy a lot of shares in the down months. This is irrelevant if the total return is lower, but for two funds that go to the same destination the winding path can be better than the straight one.

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Re: Emerging Markets
« Reply #47 on: September 16, 2015, 09:12:59 AM »
Does anyone really think that emerging markets will return 0% over the long term?

Tangentially, it's worth noting that some of them almost certainly will return 0% over the long term. A total national conflagration is plausible in Nigeria or Russia, for example. China could totally change the rules one day and investments would be worth nothing.

These aren't likely but just another bonus of an ETF rather than buying a Nigerian index fund or something insane like that.

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Re: Emerging Markets
« Reply #48 on: September 16, 2015, 09:19:52 AM »
A volatile fund that returns 0% is worse than a nonvolatile asset with a positive return rate, and I don't think brooklynguy was trying to imply otherwise.

If you have two funds that both return 5% over the long run, the more volatile one can be better for those of us who invest a little bit of new money every month, precisely because of the effect that raven15 mentioned earlier: you buy a lot of shares in the down months. This is irrelevant if the total return is lower, but for two funds that go to the same destination the winding path can be better than the straight one.

I totally get that. But that's not what raven15 said earlier, and that's the gripe I have.
High volatility is good for someone starting at 0 who will be buying in regularly, or else who has a long time frame.

Note raven15 did not say anything with respect to returns. Raven15 only said high volatility is good. Clearly, as you state, a highly volatile asset with 0% long term returns is not desirable.
Heck, why restrict ourselves to 0% returns? Why not negative returns? An asset with a negative long term real return is clearly undesirable. But if it's highly volatile, according to raven15's statement above it is desirable.

The only point I was trying to make is that high volatility in of itself is not desirable. You want some positive rate return to go with it.

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Re: Emerging Markets
« Reply #49 on: September 16, 2015, 09:25:08 AM »
Yes, of course. Volatility is not desirable in and of itself. It's more of a tiebreaker between two funds that you expect to perform equally well over the long run.