Author Topic: Overweighing emerging markets  (Read 5088 times)

joer1212

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Overweighing emerging markets
« on: October 03, 2012, 03:11:25 PM »
Here is my asset allocation in my retirement accounts:

In my 401k/457b:

10% stable fund
30% total bond index fund
25% large-cap index fund
9% mid-cap index fund
8% small-cap index fund
18% international index fund


In my Roth IRA:

50% REIT index fund
50% TIPS

My international fund consists of just 23% emerging markets. Since I allocated 18% of my 401k  to international stocks, this means that only about 4% of my 401k portfolio is in emerging markets.
Question: Is this enough, or should I purchase a separate emerging markets index fund to overweigh this sector a bit more?

Note: 4% of my 401k and 457b is in emerging markets. If I also counted my Roth IRA, it would be even less percentage than this. 
I was thinking that maybe 5%-8% of my total portfolio should be in emerging markets.
By the way, I will retire in about 7-9 years, when I'm 50-52 years-old. I have a low to moderate tolerance for risk.
* My international fund is the State Street Advisers MSCI ACWI ex-U.S.
« Last Edit: October 03, 2012, 03:18:56 PM by joer1212 »

Honest Abe

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Re: Overweighing emerging markets
« Reply #1 on: October 03, 2012, 04:07:29 PM »
I've been thinking about this lately as I looked at new fund for my 457. Emerging market funds had a great in the past 10 years. However lately the BRICs have been underperforming the US equities. Some would say that now is the time to invest in them heartily while they're down. The question that need to be asked is: was the 10% GDP growth merely a bubble that burst and isn't coming back , or is are the BRICs simply in a cyclical downturn.

Anyone's guess.

joer1212

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Re: Overweighing emerging markets
« Reply #2 on: October 03, 2012, 05:01:19 PM »
Quote
I've been thinking about this lately as I looked at new fund for my 457. Emerging market funds had a great in the past 10 years. However lately the BRICs have been underperforming the US equities. Some would say that now is the time to invest in them heartily while they're down. The question that need to be asked is: was the 10% GDP growth merely a bubble that burst and isn't coming back , or is are the BRICs simply in a cyclical downturn.

Anyone's guess.

I'm not even trying to time the market. I just want to set up a good permanent asset allocation, and, with the exception of annual rebalancing, just forget it. The question for me is, is 4% in emerging markets enough for the long run?

grantmeaname

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Re: Overweighing emerging markets
« Reply #3 on: October 08, 2012, 05:17:50 PM »
Are you counting your exposure to emerging and international markets based on the international activities of US businesses you own in your small-, mid-, and large-cap index funds? That may increase the number somewhat, but I don't know how much of that info is available on the Vanguard prospectuses.

sol

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Re: Overweighing emerging markets
« Reply #4 on: October 08, 2012, 09:54:57 PM »
I think 4% is probably significantly underweighted, if your other 96% is in the US. 

I think it's important to remember that a significant portion of the profits from US companies come from overseas.  If you own a US index fund it's full of multinationals that are already highly dependent on foreign economies.

With that out of the way, I've never really understood why someone would want to invest solely in their own country's stock market.  If the whole motivation behind diversified index investing is to broaden your exposure to reduce your risk, why not broaden to other markets?  Ideally, why not own the entire world economy in proportion to it's representation?  Since the US economy is currently about 20% of the world economy, doesn't that argue for holding 80% non-US investments?

joer1212

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Re: Overweighing emerging markets
« Reply #5 on: October 09, 2012, 11:17:27 AM »
Are you counting your exposure to emerging and international markets based on the international activities of US businesses you own in your small-, mid-, and large-cap index funds? That may increase the number somewhat, but I don't know how much of that info is available on the Vanguard prospectuses.

No, I'm only counting my direct holdings in emerging markets in the international portion of my portfolio.

joer1212

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Re: Overweighing emerging markets
« Reply #6 on: October 09, 2012, 11:26:08 AM »
I think 4% is probably significantly underweighted, if your other 96% is in the US. 

I think it's important to remember that a significant portion of the profits from US companies come from overseas.  If you own a US index fund it's full of multinationals that are already highly dependent on foreign economies.

With that out of the way, I've never really understood why someone would want to invest solely in their own country's stock market.  If the whole motivation behind diversified index investing is to broaden your exposure to reduce your risk, why not broaden to other markets?  Ideally, why not own the entire world economy in proportion to it's representation?  Since the US economy is currently about 20% of the world economy, doesn't that argue for holding 80% non-US investments?

I think you may have misunderstood my question. My portfolio consists of 4% emerging markets, not international. My international allocation is actually 18% of my 401k. This comes out to being close to 30% of the stock portion of my portfolio. Of that 18%, a portion of it consists of emerging markets. I crunched the numbers and determined that emerging markets makes up only about 4% of my total portfolio.
« Last Edit: October 09, 2012, 11:59:21 AM by joer1212 »

grantmeaname

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Re: Overweighing emerging markets
« Reply #7 on: October 09, 2012, 01:50:19 PM »
I'm only counting my direct holdings
And why is that? Unless I'm missing something, wouldn't counting the direct and indirect holdings together give you a more accurate picture of your exposure to foreign markets?

joer1212

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Re: Overweighing emerging markets
« Reply #8 on: October 09, 2012, 03:28:23 PM »
Quote
And why is that? Unless I'm missing something, wouldn't counting the direct and indirect holdings together give you a more accurate picture of your exposure to foreign markets?
Because they are two unique and distinct types of investing, so I like to keep these separate.
For one, with direct holdings you have direct currency exposure (which can work both ways), and you're also directly involved in the local socioeconomic environment, as well as the local stock markets, which is exposure you would not have if you just invested in domestic companies that do some of their business overseas.
If it was the same to invest in domestic stocks that do business globally, then there would probably be no need for a dedicated international fund to begin with.
However, this subject has become moot, as I have decided that 4% in emerging markets is quite enough for my portfolio. Many popular 'lazy portfolios' do not overweight emerging markets, and just hold a total international (ex-US) index fund, like me.
« Last Edit: October 10, 2012, 12:26:12 AM by joer1212 »

grantmeaname

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Re: Overweighing emerging markets
« Reply #9 on: October 11, 2012, 05:30:02 AM »
For one, with direct holdings you have direct currency exposure (which can work both ways), and you're also directly involved in the local socioeconomic environment, as well as the local stock markets, which is exposure you would not have if you just invested in domestic companies that do some of their business overseas.
That's what I was wondering about. Thanks.