@ ioseftavi, thank you for your insights. I am ok with volatility as long as in the long-term it's in the general direction of up. ; )
Yes, the general direction is up. But remember that this can include decade-long periods (or more, occasionally) where markets bounce around and are ultimately flat - excepting dividends, which I'm sure WTJBatman will tell you help out a great deal during these periods. Over a 15 - 20+ year timeframe, it starts to become pretty damn certain that equities will have been your best bet.
I have heard emerging markets have the biggest potential growth upside, but I have no idea where I heard it or if it's true. It makes sense on the surface.
From the papers I have read and what I've seen, this is true. My understanding is that frontier / developing markets grow faster for a few reasons:
- faster population growth in these regions (by far one of the biggest variables in impacting GDP growth, which - in essence - is really all the stock market indices are showing you)
- The economies are starting out from a far lower base in terms of GDP / capita (For the US to grow its economy 10% in a year would be extremely difficult, but for India, this might be attainable with a few key structural reforms and advances in tech, infrastructure, etc)
- The capital markets in these countries (legal, governmental, and financial framework governing investments) are far less developed. Disclosure is worse. Corruption may be rampant. The government might enact rules that are extremely harmful to foreign investors. You have a much higher than average of getting screwed, to put it bluntly. So investors demand higher-than-average returns to compensate for this risk.
There is a boring paper or two that says this in so many words. I'll link it if I can remember where to find it.
From this post and previous ones of yours IIRC you work in finance right? So a follow up question for you: how aggressive is your portfolio...
Yes, I work in finance.
My portfolio (combined with my fiancees - we run our accounts as if they were one large pot, since it's all for our retirement) is about 75% stocks, 25% bonds/cash. A 'neutral' allocation for me would probably be more like 80% or 85% in stocks. So I'm currently a bit underweight in stocks, but me and the fiancee are both still maxing out our retirement accounts, and the vast majority of those contributions are still going towards stocks - despite my small underweighting.
Basically, I'm comfortable calling stocks "historically expensive" at this point, but the most I will allow myself to do is tilt my asset allocation by 5 or 10%. That's enough to satisfy my inner finance nerd, without doing something that could be a big, Stache-fucking mistake. I don't think I would ever allow myself to deviate by more than that amount - it would just invite dumb behavior.
...and do you have any clients you build an ultra-aggressive portfolio for?
If you knew there was no need to use this money for at least 10 years (likely closer to 20-25) would you consider a plan like mine after adding in a bit of emerging markets? I'm fairly certain I can take the swings but obviously won't know for sure until they happen. I've read enough here and elsewhere though to know it would just be a buying opportunity.
I no longer work in a client-facing role, so I don't build portfolios for people professionally. I help about a dozen friends and family members with their retirement accounts, but for the vast majority of people, I suggest a low-cost asset allocation fund that fits with what they're trying to do. Also make sure they're using tax-advantaged accounts to their fullest, tax-loss harvesting in taxable accounts, not owning too much company stocks, blah blah blah blah blah. Bogleheads-type stuff, for the most part.
When I did meet with clients, typically the most aggressive allocation you could agree on was, I believe, 100% stocks, with around a 30% sub-allocation to international. Within those categories, we generally would suggest a neutral sub-mix between small/mid/large cap, value/blend/growth, developed/emerging/frontier markets. That submix wouldn't change based on valuations or outlooks for those different pieces - only your risk tolerance might change them. Even then, we're talking tiny tweaks.
The reason we didn't suggest sub-allocation tweaks (overweight midcap, underweight international, etc) was that we didn't want to attempt to do anything that could be construed as market timing (even a little bit) or make the kind of changes that would later need to be "undone". Over-weighting or under-weighting an asset class
now means that you need to have a goal
later for when you'll undo that decision. We couldn't be sure that the client would want to do that, when the time came.
So the solution that my former firm (and most other firms) used was to just focus on getting people to their asset allocation and then helping them maintain it. If you were a 50/50 stock/bond investor for your retirement accounts (let's say a couple who's just started retirement, age 60), we try to keep your retirement accounts 50/50 as best we can when we work with you. Your asset allocation is your asset allocation is your asset allocation.
Bull markets, bear markets, "feelings" you have about what's mispriced - none of those changed your asset allocation. The only thing that changed it was, first and foremost, your time horizon. The second thing (less important, but a factor) was your risk tolerance / personal situation.
As far as, "Would you consider a plan like mine?": For a 10 year time horizon, I definitely would not. For a 15-25 year horizon, I might start to. However (and I realize I'm going to piss off some of the folks here who don't like to make any comments about where the market is), I wouldn't enact this kind of a plan now. VEMAX - as an example - has rewarded investors with a 14.4% annualized return for the 5 most recent calendar years (2009 - 2013). This is a great result, but it's also unsustainable - and I suspect a lot of investors will find this out when we have a real downturn in emerging markets, and that return reverts to the average 9-11ish kind of range. The last downturn was a mild pullback (-18%) in 2011. When an actual recession happens and emerging markets are hit 40-60%, I think VEMAX and similar funds will find that a lot of people who were really enthusiastic to own emerging markets stocks suddenly lose their appetite for risk.
So, with all that said: If we were currently going through some serious emerging market turmoil that had just lopped 25% or more off valuations in the space? Yes, I might consider increasing exposure there personally, for moneys that had a 15 or 20 year time horizon. But I would do it knowing that they could just as easily lose another 20-30% in the near term, and I would plan on it taking 3 - 10 years for my choice to work out, if it went well. Also, my tweak would likely be pretty small (perhaps 5% more in international than my neutral allocation).
Jesus this is a long post and that's on my first cup of coffee. Hope that helped explain my thinking.
