Your portfolio asset allocation

[SpokaneAl]

Well, of course a home is an asset. Hopefully over time it is an appreciating asset. My car is an asset as well, albeit a depreciating asset. Both are factored into the equation when I calculate my net worth. The difference in classifying them as use assets is that, for me at least, they are not a part of my investment equation.

assuming your home appreciates... what then? you sell it and build/buy a cheaper one? or move to a cheaper area and acquire an equivalent home?

my questions are not rhetorical. i am really interested why people long for appreciation of the real estate they use for living.

It sounds like you and I are on the same page. For most home appreciation just adds to the net worth, because they gotta have a place to live. We sold our house last year and bought a smaller one - however it cost us more than we got out of the sale of our previous home. Those who move to places like Thailand can probably net a nice profit that will help with living expenses. My point is whatever you do, one's personal balance sheet should reflect all assets and liabilities to determine an accurate personal net worth.

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i have no idea what our homes are worth, that applies especially to the home in Thailand. that's why it is impossible to consider it an asset or add a fictitious value to our net worth. it would of course be different if we had any plans or due to some circumstances forced to sell. because only then i'd try to find out their actual market values.

shooting from the hip i dare say that 90% of the postings concerning this topic show an unhealthy obsession with appreciation.

Again, I agree. I don't loose a lot of sleep on tracking our home value, although being a bit anal retentive, I like to plug in a number into my financial software. For our stateside home I use the amount that property taxes are based on, knowing that this number is merely a percentage of the actual value.

And since our Thailand home, as a part of our estate planning, will go to relatives over here at some point in the future, I don't track it's value towards our net worth number.

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[fletchsmile]

Although you are certainly diversified, that’s a pretty risky portfolio and I do not think the upside reward will justify the downside risk for long-term investing. As for holding mostly US stocks, it is preferred by many because the risk reward calculation most people do (it is also the lowest fee situation).

I see a lot of advice on the amount in equities versus bonds – please note, a lot of recent research shows that 70 – 30 is best for maximizing returns and minimizing risk (as in going to 80% equities does not give you enough upside to justify the increased downside risk). Gold is indeed a fools errand.

I am almost entirely ETF now to keep the fees low, everything index.

Perception of a portfolio's risk very much depends upon the time frame one's considering. My portfolio is designed like a university endowment, i.e. a perpetual portfolio. Over such timescales equities will almost inevitably outperform bonds, and developing markets will outperform more established ones. I'm as confident as I can be that the upside reward justifies the downside risk.

As for holding mostly US stocks, a lot of people do it. However, they are Americans. In England people mostly hold British stocks. And in Japan people mostly hold Japanese stocks. It sort of makes sense if you're living in the country, matching your investments to the local economy. If you're an expat living in Thailand or plan to retire there it's folly to invest primarily in US stocks.

Incidentally, charges are low on American mutual funds, ETFs, &c. for the reason that the market is very well researched so active management can add very little. That is definitely not true in smaller, less well researched markets such as Thailand. Whilst I'd be happy to use a passive strategy in the US, I wouldn't in emerging markets. (Exception: I own EGShares Emerging Markets Core ETF, EMCR, which I think is a well-designed product.)

As for a 70/30 split being best, there is no one right solution. For a perpetual portfolio a 0% allocation to conventional bonds is perfectly reasonable because the upside is very limited. Life stage is also important for many people with a shorter term view, and conventional wisdom is changing. See, for example, http://online.wsj.com/news/articles/SB10001424052702304866904579268332305015074?mod=WSJ_hps_sections_yourmoney or http://alphabaskets.com/turning-asset-allocation-upside-down/ ).

In my opinion, emerging markets are just not worth the risk. I know some people don’t agree with this, but if you are chasing higher returns, several scholarly papers (not the glossy marketing materials from investment companies) have shown that small cap and similar investments in developed markets have higher returns with lower risks than emerging markets for people who hold investments. Granted, past performance if no predictor of future performance, but statistically, it’s been demonstrated that it’s not worth the risk for long-term investors, as there are better, less risky alternatives. Worse, it has been shown that emerging market growth has no correlation to emerging market equity performance. For short-term investment, it depends on your ability to time the market – not an easy prospect. Emerging markets also have the added risk of unpredictable inflation and exchange rates – investment killers.

I would also point out that university endowments have much larger portfolios than you and can get “better” advice to manage their money. Larger endowments are usually invested with hedge funds and other non-equity investments – investments you and I will never get a whiff of. I am not aware of any reference to universities following the allocation you mentioned (though my knowledge is US-based). Endowments also don’t pay taxes – which substantially improves their real returns. But most of all, you are not a univertisy, you will access your money at some point. Universities just want the interest.

You might want to look hard and long again at your US equities' performance for the first 10 years of the new century/ millenium we are in. Many developed markets such as the US were flat or even down, between 31 Dec 1999 and 31 Dec 2009. Not for nothing do many Americans, Europeans etc refer to it as a "lost decade!"

Meanwhile those of us who look at EMs as part of a portfolio had a great time trebling and quadrupling money. Thailand included.

{Of course to be fair the decade before included the Asian Financial crisis instead of the hamburger crisis. However, Thailand learnt from its mistakes and came thru the GFC well. I wouldn't say the US has learnt from many its mistakes even this time...}

(Some of) the points being the world is a very different place now in this century + it doesn't need to be either developed or EM - hence the allocations and a portfolio approach.

Cheers

Fletch

[fletchsmile]

...

Edited January 22, 2014 by fletchsmile

[Ludacris]

Thanks for the feedback on the portfolios I posted.

I totally agree physical property is much better, but for me right now the benefits of a REIT outweight the headaches of having a property management company manage something back home. I think a condo is a bad investment long-term for capital appreciation, and I'm not going to buy a house in Thailand. I won't rule out buying something back home in the future though.

Yes, the growth in China may be slowing at the moment, but I think not investing in one of the largest markets in the world which has a fast expanding middle-class would be a mistake. Remember my investment time frame is 25-30 years, and there's lots of room for more growth in China. In fact, even if China grows at the currently projected 7% (which they call a slowdown), that's still a lot faster than developed countries. Sure it might take a few years or whatever for valuations to settle down, but long term I see lots of potential.

Point taken about managed products for China and emerging markets. Typically I prefer ETF's, but I use managed funds in Thailand so I will take a look at other markets as well. Thanks! Can you suggest a few?

If frontier markets or other markets become overvalued short term, I'm fine with that because again my time frame is 25-30 years.

The reason for including Vanguard Extended market along with other mid and small cap ETF's is the Vanguard fund is more like an index fund with over 3000 holdings while EZM and RZV are more speciality indexes with just a few hundred holdings. This way I'm able to get index exposure while overweighting with other outperforming indexes at the same time. Point taken about overlap vs. diversification.

My bad about the ASEA fund. Yes, it is supposed to be the Global X ASEAN 40, not Guggenheim. I choose that to hopefully take advantage of the ASEAN economic zone that comes into affect next year which should provide for growth over the next few decades. Even if the ASEAN agreement doesn't have much affect, I still see the region outperforming in the long run.

I agree the Guggenheim spin-off is out of place and the premise doesn't really make sense. The reason I chose that one is it has been one of the best performing non-sector, non-leveraged ETF's in the world over the past 5 years (317% cumulative 5 year return). It does have a small number of holdings (33) and it is very possible those companies are in a bubble or overvalued, so I definitely need to keep an eye on that fund. That's probably one of the more risky plays I have and I should look at replacing it with something more diversified.

Naam, I totally respect all your posts on here but for someone with my investing time frame and net-worth, equities and capital appreciation are the way to go. I have a feeling you are a very high net-worth individual, and in that case bonds for the long run and investing for income definitely make sense. Don't quote me on this, but I remember reading something about how bonds have underperformed equities in every long-term period ever studied. That combined with the notion that the 30-year or so bull market for bonds has ended, someone in my position having a high weighting in bonds doesn't make sense.

[OnMyWay2]

I was just looking at my numbers the other day

75% real estate

20% cash

5% stocks

I overweighted the appreciation assets early on so I could eventually sell them and move into more stable investments.

That plan seems to have worked out well so far.

Edited January 22, 2014 by OnMyWay2

[AyG]

Gold, bonds and cash are simply a drag on performance. You'll almost certainly not even be beating inflation with cash.

i [not so] humbly beg to disagree in 36 years of investing i only held bonds, never touched any equities and retired quite well-off 24 years ago. i also claim that a healthy pile of cash came always in handy in times of the multiple crises i have experienced.

For someone extremely risk-averse a bond-only portfolio might be an appropriate solution. It's probably somewhat better than simply putting the money under the mattress. However, the long term returns from equities are vastly superior.

Consider $1,000 invested 36 years ago (since 1978). It could have grown as follows (all income reinvested):

S&P 500: $50,288.26

3-month Treasury bills: $5,377.17

10-year Treasury bonds: $13,719.27

(Treasury data from the Federal Reserve database in St. Louis (FRED).)

Yes, you can get higher returns from lower quality bonds, but then you take on equity-like risk.

I guess one's primary goal should be to have enough money throughout one's life to support one's desired lifestyle. However, I suspect most of us think having a bit more money would be nice.

[AyG]

Out of curiosity I reran my calculations assuming that one took out 4% of the fund's value at the end of each year to see what would happen (4% being a value that's commonly accepted as meaning that the money is unlikely to run out during one's lifetime). After 36 years you'd have:

S&P 500: $12,049.24
3-month Treasury bills: $1,288.39
10-year Treasury bonds: $3,287.18

With annual incomes of $481.97, $51.54 and $131.49 respectively.

[Naam]

Gold, bonds and cash are simply a drag on performance. You'll almost certainly not even be beating inflation with cash.

i [not so] humbly beg to disagree in 36 years of investing i only held bonds, never touched any equities and retired quite well-off 24 years ago. i also claim that a healthy pile of cash came always in handy in times of the multiple crises i have experienced.

For someone extremely risk-averse a bond-only portfolio might be an appropriate solution. It's probably somewhat better than simply putting the money under the mattress. However, the long term returns from equities are vastly superior.

Consider $1,000 invested 36 years ago (since 1978). It could have grown as follows (all income reinvested):

S&P 500: $50,288.26

3-month Treasury bills: $5,377.17

10-year Treasury bonds: $13,719.27

(Treasury data from the Federal Reserve database in St. Louis (FRED).)

Yes, you can get higher returns from lower quality bonds, but then you take on equity-like risk.

I guess one's primary goal should be to have enough money throughout one's life to support one's desired lifestyle. However, I suspect most of us think having a bit more money would be nice.

"However, the long term returns from equities are vastly superior."

i consider this "vastly" an exaggeration

a typical bond investor who (like me) invests mostly in "HY niche" bonds and only in Treasuries, Gilts or Bunds when their yields are double digits (Gilts 1978-1983, UST 1982-1986, Bunds early 90s).

he also does not focus on one currency, id est any long term comparison (e.g. with Treasuries denominated in USD) is completely irrelevant . except for the last "QE years" and the crisis years 1998 and 2008 i never experienced a single year in which paid interest and capital appreciation was below 20%, in good years such as 1999-2002, 2003-2005 total yield was always >30% and in "one in a lifetime" year like 2009 it was not a problem to double, triple or quadruple invested capital.

[SheungWan]

Well, of course a home is an asset. Hopefully over time it is an appreciating asset. My car is an asset as well, albeit a depreciating asset. Both are factored into the equation when I calculate my net worth. The difference in classifying them as use assets is that, for me at least, they are not a part of my investment equation.

assuming your home appreciates... what then? you sell it and build/buy a cheaper one? or move to a cheaper area and acquire an equivalent home?

my questions are not rhetorical. i am really interested why people long for appreciation of the real estate they use for living.

Sell it and downsize, which I did and many people do.

Edited January 23, 2014 by SheungWan

[meand]

I don't know, on the house as investment vs asset, I think it is semantics. Perhaps not to some.

If you live in your house, you are effectively making "rent" every month by not paying it. Why is it different than if you rented it out? Anyway, I think it is semantics, others will say no it's not. Both are fine

[AyG]

except for the last "QE years" and the crisis years 1998 and 2008 i never experienced a single year in which paid interest and capital appreciation was below 20%, in good years such as 1999-2002, 2003-2005 total yield was always >30% and in "one in a lifetime" year like 2009 it was not a problem to double, triple or quadruple invested capital.

You have either been exceptionally skilled or exceptionally lucky. I just wonder why the professional fund managers can't produce anything like the returns you've been getting? Looking at a handful of Morningstar 5* rated fund managers in the Global High Yield sector, they've managed the following annual returns (all in USD):

T. Rowe Price Global High Yield Bond Fund Z Acc -3.50 2.76 7.46 29.86 18.80 4.90 10.47 6.84

Goldman Sachs SICAV - Goldman Sachs Global High Yield Portfolio IO Cap -3.59 41.57 18.51 4.11 10.92 6.9

Aviva Investors Global High Yield Bond I USD Acc 34.32 18.91 6.59 10.50 4.51

Robeco Capital Growth Funds - Robeco High Yield Bonds IH USD 17.97 3.43 12.70 5.93

Occasional years of high returns, but plenty of years with poor ones - and these fund managers are supposedly the best of the best.

The T. Rowe Price fund (the only one with a 10 year record) has given an annualised return over 10 years of 9.52%.

Sorry, I just can't see the attraction.

[Naam]

except for the last "QE years" and the crisis years 1998 and 2008 i never experienced a single year in which paid interest and capital appreciation was below 20%, in good years such as 1999-2002, 2003-2005 total yield was always >30% and in "one in a lifetime" year like 2009 it was not a problem to double, triple or quadruple invested capital.

You have either been exceptionally skilled or exceptionally lucky. I just wonder why the professional fund managers can't produce anything like the returns you've been getting? Looking at a handful of Morningstar 5* rated fund managers in the Global High Yield sector, they've managed the following annual returns (all in USD):

T. Rowe Price Global High Yield Bond Fund Z Acc -3.50 2.76 7.46 29.86 18.80 4.90 10.47 6.84

Goldman Sachs SICAV - Goldman Sachs Global High Yield Portfolio IO Cap -3.59 41.57 18.51 4.11 10.92 6.9

Aviva Investors Global High Yield Bond I USD Acc 34.32 18.91 6.59 10.50 4.51

Robeco Capital Growth Funds - Robeco High Yield Bonds IH USD 17.97 3.43 12.70 5.93

Occasional years of high returns, but plenty of years with poor ones - and these fund managers are supposedly the best of the best.

The T. Rowe Price fund (the only one with a 10 year record) has given an annualised return over 10 years of 9.52%.

Sorry, I just can't see the attraction.

You have either been exceptionally skilled or exceptionally lucky.

we have a saying in Germany (i am a German) "the dumbest peasants harvest the biggest potatoes."

joke aside...

-no fund manager can act as fast as an individual private investor.

-managers of big funds are burdened with the fact that their positions are huge and that sales and purchases can and are moving prices considerably, i.e. they can hardly ever retire an existing position fully and switch into a new one within a rather short period (one trading day). the 100, 200 or even 500k a private investor handles does not move prices when the daily trading volume exceeds 10mm.

-fund managers are trying to match or beat an index. except for high risk hedge fund managers they are bound and can only act within a certain range limited by multiple restrictions.

-morning star ratings of "5*" are not handed out to funds or sub-funds who invest in high yield / high risk assets which provide a multiple of the yield achieved with high rated investment grade assets.

-private investors try to achieve yield and are not bound by any restrictions except their personal level of risk perception and of course they don't strive for a good morning star rating.

-last not least, a good portion of luck is indeed one of the factors leading to financial success. no amount of extensive research or skills acquired by experience can replace it.

[Ludacris]

I envy the results you've obtained over the years Naam.

But I have to say that any bond that has a yield in the double digits and has the potential to double, triple, or even quadruple in one year is extremely risky. Much riskier than most equity funds and so risky that you couldn't put a large portion of your portfolio into it. Just like with options, all it would take is one large bet that went bad to seriously hurt your portfolio.

If you have invested in bonds like that throughout your career and haven't had one big blow-up destroy your portfolio, your results are to be congratulated.

To achieve your kind of results I'm going to go out on a limb and suggest that some kind of 'special' knowledge about the actual the bond or company and/or how the system works would be required. For example, knowing which high-risk, high yield bonds weren't truly as risky as the yield suggested. I doubt you were able to get those results just on your own while working a day job, and the kind of broker attention required to pull that off is only available to extreme net-worth clients. Quite possibly you could even be a retired bond manager who had special access to information and a company trading platform and figured out how the system could be beat in certain instances- you could have then managed your own money on the side not bound by the company rules or the large amounts.

I guess my point is that returns like that over the long-term don't come without extreme risk or inside information, and that kind of risk will probably blow-up 99% of accounts of us 'dumb peasants'.

Edited January 23, 2014 by Ludacris

[Naam]

Ludacris,

-i, the dumb peasant, had a big blow-up in 1998 because i went on a 5 week jungle trip, overexposed and without any means of communication. fortunately the following years were ideal to compensate.

-that bonds which yield double digits are high risk goes without saying.

-as far as possible capital gains are concerned below a graph. a picture tells more than a thousand words.

-"knowing which high-risk, high yield bonds weren't truly as risky as the yield suggested."

no default risk existed when the AAA rated Gilts of the United Kingdom of Great Britain and Northern Ireland yielded 13-14% end of the seventies till mid 80s and no default risk was to be feared when AAA rated Treasuries issued by "The Greatest Nation on Earth™" yielded 14-16% from 1980 till the mid 80s.

-so risky that you couldn't put a large portion of your portfolio into it

fact is that all my eggs were in maximum three baskets (sometimes only in one) till 1989 when i was working in the desert, the bush and the swamps.

-I doubt you were able to get those results just on your own while working a day job, and the kind of broker attention required to pull that off is only available to extreme net-worth clients.

-i never used a broker and only for some very short periods i owned a few funds (which were losers).

-Quite possibly you could even be a retired bond manager

i am a (happily retired) physicist and mechanical engineer.

one example of many dozens how sovereign debt of countries like Mexico, Brazil, Venezuela, Colombia, Philippines, Viet Nam, Indonesia et al (the list is much longer) performed based on timing:

Russian Federation, ISIN XS0088543193

coupon 12.75% traded in january 1999 at 23%, 6 years later at 189%.

during this period 76.50% interest was paid,

capital gains same period 621%,

measly $115,000 invested in 1999 were 6 years later (including paid interest) worth $ 1,032,975

note: the good times are over! Quantitative Easing provided in 2009 the last chance, as mentioned, to double, triple or "x-le" bond investments. achieving 20% p.a. combined through interest and capital gains is nowadays hard work and risky. not recommended for the inexperienced and faint-hearted ones

the afore-mentioned does of course not apply to experts in stock picking where sky is the limit as far as profits are concerned.

[SpokaneAl]

Ludacris,

-i, the dumb peasant, had a big blow-up in 1998 because i went on a 5 week jungle trip, overexposed and without any means of communication. fortunately the following years were ideal to compensate.

-that bonds which yield double digits are high risk goes without saying.

-as far as possible capital gains are concerned below a graph. a picture tells more than a thousand words.

-"knowing which high-risk, high yield bonds weren't truly as risky as the yield suggested."

no default risk existed when the AAA rated Gilts of the United Kingdom of Great Britain and Northern Ireland yielded 13-14% end of the seventies till mid 80s and no default risk was to be feared when AAA rated Treasuries issued by "The Greatest Nation on Earth™" yielded 14-16% from 1980 till the mid 80s.

-so risky that you couldn't put a large portion of your portfolio into it

fact is that all my eggs were in maximum three baskets (sometimes only in one) till 1989 when i was working in the desert, the bush and the swamps.

-I doubt you were able to get those results just on your own while working a day job, and the kind of broker attention required to pull that off is only available to extreme net-worth clients.

-i never used a broker and only for some very short periods i owned a few funds (which were losers).

-Quite possibly you could even be a retired bond manager

i am a (happily retired) physicist and mechanical engineer.

one example of many dozens how sovereign debt of countries like Mexico, Brazil, Venezuela, Colombia, Philippines, Viet Nam, Indonesia et al (the list is much longer) performed based on timing:

Russian Federation, ISIN XS0088543193

coupon 12.75% traded in january 1999 at 23%, 6 years later at 189%.

during this period 76.50% interest was paid,

capital gains same period 621%,

measly $115,000 invested in 1999 were 6 years later (including paid interest) worth $ 1,032,975 RF28.jpg

note: the good times are over! Quantitative Easing provided in 2009 the last chance, as mentioned, to double, triple or "x-le" bond investments. achieving 20% p.a. combined through interest and capital gains is nowadays hard work and risky. not recommended for the inexperienced and faint-hearted ones

the afore-mentioned does of course not apply to experts in stock picking where sky is the limit as far as profits are concerned.

Wow. Thanks for sharing your insight on a part of the investment world that is foreign/unknown to me.

Sent from my iPad using Thaivisa Connect Thailand mobile app

[Naam]

Wow. Thanks for sharing your insight on a part of the investment world that is foreign/unknown to me.

Sent from my iPad using Thaivisa Connect Thailand mobile app

it's not only foreign/unkown to you but as you are a U.S. citizen (your quote "our stateside home") direct investment in most of the assets i referred to are out of reach.

United States federal security laws prohibit direct investment in high risk assets unless you apply and receive the status of "accredited investor". when i was a U.S. person (foreigner but liable to pay U.S. income tax) it took me several months to acquire that approval.

In the United States, for an individual to be considered an accredited investor, he or she must have a net worth of at least one million US dollars, not including the value of one's primary residence or have income at least $200,000 each year for the last two years (or $300,000 together with his or her spouse if married) and have the expectation to make the same amount this year."

Edited January 24, 2014 by Naam

[Ludacris]

Thanks Naam, I appreciate your replies. You've been investing for decades and have been very successful at it, even after having a few bumps in the road. Congrats!

Do you mind if I ask how you made your 1st million?

Also, do you have any porfolio advice for someone who doesn't meet the 'accredited investor' requirements?

[Naam]

Thanks Naam, I appreciate your replies. You've been investing for decades and have been very successful at it, even after having a few bumps in the road. Congrats!

Do you mind if I ask how you made your 1st million?

Also, do you have any porfolio advice for someone who doesn't meet the 'accredited investor' requirements?

i made my first million mainly by hard work, 12-14 hours a day, 7 days a week, surrounded by desert on one side and by the sea on the other side. of course, investing helped partially to own for the first time "7 digits" (decimal points not counted)

sorry mate! giving any advice without knowing a dozen or more background facts would be extremely reckless. but if you live in the Pattaya area you are welcome for an hour or two of small talk and a glass of wine... or two

note: i wouldn't be able to give any investment advice with a long term validity because (especially nowadays) high yield/high risk investments have to be tracked and evaluated daily. the latter not once but up to three times a day. that means, as i mentioned before, hard work but interesting and last not least some fun when successful. when not successful... not much fun

by the way... a helpful tool to assist investment is the Thaivisa forum. when i want to relax in between trades or exhausting research i klick on another screen which says "view new content". then i read the latest questions, complaints, comments or observations such as

-why is it that Thais <insert whatever comes to your mind>?

-will a different exhaust add 1½ horsepowers to my <insert motorbike>?

-i don't hate Russian tourists but i wish they all stayed in Siberia!

-yesterday my racist noodle soup vendor jacked up the price by 5 Baht.

-has your Thai wife/girlfriend/boyfriend a tatoo on her/his butt? if yes, why?

-bought an <insert brand> aircon. doesn't use electricity but produces. also very quiet.

the funniest and most interesting postings i share by reading them loud to my dogs. quite often i forget then they demand treats and ask "any new funny postings in TV?" or "what happened to <insert currency>? is it up or down vs. the Baht?"

[Furbie]

In my opinion, emerging markets are just not worth the risk. I know some people don’t agree with this, but if you are chasing higher returns, several scholarly papers (not the glossy marketing materials from investment companies) have shown that small cap and similar investments in developed markets have higher returns with lower risks than emerging markets for people who hold investments. Granted, past performance if no predictor of future performance, but statistically, it’s been demonstrated that it’s not worth the risk for long-term investors, as there are better, less risky alternatives. Worse, it has been shown that emerging market growth has no correlation to emerging market equity performance. For short-term investment, it depends on your ability to time the market – not an easy prospect. Emerging markets also have the added risk of unpredictable inflation and exchange rates – investment killers.

I would also point out that university endowments have much larger portfolios than you and can get “better” advice to manage their money. Larger endowments are usually invested with hedge funds and other non-equity investments – investments you and I will never get a whiff of. I am not aware of any reference to universities following the allocation you mentioned (though my knowledge is US-based). Endowments also don’t pay taxes – which substantially improves their real returns. But most of all, you are not a univertisy, you will access your money at some point. Universities just want the interest.

You might want to look hard and long again at your US equities' performance for the first 10 years of the new century/ millenium we are in. Many developed markets such as the US were flat or even down, between 31 Dec 1999 and 31 Dec 2009. Not for nothing do many Americans, Europeans etc refer to it as a "lost decade!"

Meanwhile those of us who look at EMs as part of a portfolio had a great time trebling and quadrupling money. Thailand included.

{Of course to be fair the decade before included the Asian Financial crisis instead of the hamburger crisis. However, Thailand learnt from its mistakes and came thru the GFC well. I wouldn't say the US has learnt from many its mistakes even this time...}

(Some of) the points being the world is a very different place now in this century + it doesn't need to be either developed or EM - hence the allocations and a portfolio approach.

Cheers

Fletch

Good cherry picking starting off with the boom year for MSCI emerging market, and a year before a big downturn in US equities and ending on a big downturn. Of course if I adjust the 10 year period the results are different. If I do Jan 1 2003 to Dec 31 2012 period the return on US equities is almost 9% - and that is not a diversified portfolio, that’s just the broad S&P.

Let’s do less cherry picking and something more relevant (as in what we would see in a summary report) – last 10 years,5 years, 1 year:

INDEX 1yr, 5yr. 10yr.

S&P 500 24.95 19.63 7.01

MSCI Emerging Markets Index (2.6) 14.79 11.17

MSCI EM Small Cap 1.04 19.58 11.97

Russell 2000 (US Small cap) 38.82 20.08 9.07

S&P 600 (US small cap) 41.18 24.35 10.65

S&P 600 Growth (US small cap) 42.69 22.71 11.53

Here are some of the risk/volatility numbers for related index funds:

FUND Sharpe Ratio Beta Standard Deviation

SPY (S&P 500) 1.29 1 12.08

EEM (MSCI) -.05 1.09 19.42

IEMS (MSCI Small Cap) -.11 .98 19.87

NAESX (Small Cap) 1.02 1.29 16.28

SLY (small cap) 1.16 .93 15.54

The extra return for the MSCI EM is not worth the added volatility to me (though the US small cap growth [what I invest in] beat the main emerging markets index in every period presented). The Sharpe ratio is also negative for emerging markets (for those who are not familiar with risk measure, a Sharpe ratio measures the returns relative to the amount of investment risk – the high the number, the better compensated you are for the risk). This is why US Small Cap is recommended over emerging markets, you are better compensated for the risk you take - it has similar returns with less volatility.

Note - I have edited this post several times due to chart formatting and some typos.

Edited January 25, 2014 by Furbie

[fletchsmile]

Good cherry picking starting off with the boom year for MSCI emerging market, and a year before a big downturn in US equities and ending on a big downturn. Of course if I adjust the 10 year period the results are different. If I do Jan 1 2003 to Dec 31 2012 period the return on US equities is almost 9% - and that is not a diversified portfolio, that’s just the broad S&P.

Let’s do less cherry picking and something more relevant (as in what we would see in a summary report) – last 10 years,5 years, 1 year:

INDEX 1yr, 5yr. 10yr.

S&P 500 24.95 19.63 7.01

MSCI Emerging Markets Index (2.6) 14.79 11.17

MSCI EM Small Cap 1.04 19.58 11.97

Russell 2000 (US Small cap) 38.82 20.08 9.07

S&P 600 (US small cap) 41.18 24.35 10.65

S&P 600 Growth (US small cap) 42.69 22.71 11.53

Here are some of the risk/volatility numbers for related index funds:

FUND Sharpe Ratio Beta Standard Deviation

SPY (S&P 500) 1.29 1 12.08

EEM (MSCI) -.05 1.09 19.42

IEMS (MSCI Small Cap) -.11 .98 19.87

NAESX (Small Cap) 1.02 1.29 16.28

SLY (small cap) 1.16 .93 15.54

The extra return for the MSCI EM is not worth the added volatility to me (though the US small cap growth [what I invest in] beat the main emerging markets index in every period presented). The Sharpe ratio is also negative for emerging markets (for those who are not familiar with risk measure, a Sharpe ratio measures the returns relative to the amount of investment risk – the high the number, the better compensated you are for the risk). This is why US Small Cap is recommended over emerging markets, you are better compensated for the risk you take - it has similar returns with less volatility.

Note - I have edited this post several times due to chart formatting and some typos.

Actually it wasn't cherry picking, simply picking the first complete decade of the 21st century, as I happen to believe that the 21st century is a very different place to the 20th in terms of investment, for both US and Thailand

Now you've cherry picked you favourite period on the other hand, let me add a few more points:

(1) Anyone that compares the uses MSCI EM markets for appraisals really doesn't understand EMs. There are such a wide range of EMs and that includes many of the basket cases that drag down performance if you understand your markets. There are certain EMs I wouldn't touch with a barge pole

(2) On the other hand let's look at a better quality EM in a country where we live that is highly relevant to the thread. Take a look at Thailand. More specifically Aberdeen Growth: an active managed fund in this single EM (that isn't a basket case):

For your chosen period 1 Jan 2003 to 31 Dec 2012 the returns are:

1 Yr +53%, 5 Yr +122%, 10 Yr +611% or annualised:

1 Yr + 53%, 5 Yr +17.3%, 10 Yr+21.7%

Remember you cherry picked this period not me. The 5 yr period for Thailand obviously includes the GFC (as it does for US) and the Thai floods of 2011 ( a disadvantage for Thailand as you know well), so 2 out of 5 being somewhat unusual, yet it still holds up well in your cherry picked period.

Over 10 years for your chosen period ABG has knocked the socks off all the indices you mention. You mention 9%pa for S&P, ABG on the other hand has returned over 600%+ (21.7%pa) !!!!

So my conclusion is yes if you don't understand your EMs and think they are all the same you might reach your conclusion using the MSCI EM index. If you know your way around though and realise that EMs are not a homogenous group and differ very widely there is good money to be made.

... And yes I've been invested in ABG throughout this time, so thanks for the confirmation of choice that it was preferable to US stocks even over your cherry picked period

Cheers

Fletch

Edited January 26, 2014 by fletchsmile

[Furbie]

Good cherry picking starting off with the boom year for MSCI emerging market, and a year before a big downturn in US equities and ending on a big downturn. Of course if I adjust the 10 year period the results are different. If I do Jan 1 2003 to Dec 31 2012 period the return on US equities is almost 9% - and that is not a diversified portfolio, that’s just the broad S&P.

Let’s do less cherry picking and something more relevant (as in what we would see in a summary report) – last 10 years,5 years, 1 year:

INDEX 1yr, 5yr. 10yr.

S&P 500 24.95 19.63 7.01

MSCI Emerging Markets Index (2.6) 14.79 11.17

MSCI EM Small Cap 1.04 19.58 11.97

Russell 2000 (US Small cap) 38.82 20.08 9.07

S&P 600 (US small cap) 41.18 24.35 10.65

S&P 600 Growth (US small cap) 42.69 22.71 11.53

Here are some of the risk/volatility numbers for related index funds:

FUND Sharpe Ratio Beta Standard Deviation

SPY (S&P 500) 1.29 1 12.08

EEM (MSCI) -.05 1.09 19.42

IEMS (MSCI Small Cap) -.11 .98 19.87

NAESX (Small Cap) 1.02 1.29 16.28

SLY (small cap) 1.16 .93 15.54

The extra return for the MSCI EM is not worth the added volatility to me (though the US small cap growth [what I invest in] beat the main emerging markets index in every period presented). The Sharpe ratio is also negative for emerging markets (for those who are not familiar with risk measure, a Sharpe ratio measures the returns relative to the amount of investment risk – the high the number, the better compensated you are for the risk). This is why US Small Cap is recommended over emerging markets, you are better compensated for the risk you take - it has similar returns with less volatility.

Note - I have edited this post several times due to chart formatting and some typos.

Actually it wasn't cherry picking, simply picking the first complete decade of the 21st century, as I happen to believe that the 21st century is a very different place to the 20th in terms of investment, for both US and Thailand

Now you've cherry picked you favourite period on the other hand, let me add a few more points:

(1) Anyone that compares the uses MSCI EM markets for appraisals really doesn't understand EMs. There are such a wide range of EMs and that includes many of the basket cases that drag down performance if you understand your markets. There are certain EMs I wouldn't touch with a barge pole

(2) On the other hand let's look at a better quality EM in a country where we live that is highly relevant to the thread. Take a look at Thailand. More specifically Aberdeen Growth: an active managed fund in this single EM (that isn't a basket case):

For your chosen period 1 Jan 2003 to 31 Dec 2012 the returns are:

1 Yr +53%, 5 Yr +122%, 10 Yr +611% or annualised:

1 Yr + 53%, 5 Yr +17.3%, 10 Yr+21.7%

Remember you cherry picked this period not me. The 5 yr period for Thailand obviously includes the GFC (as it does for US) and the Thai floods of 2011 ( a disadvantage for Thailand as you know well), so 2 out of 5 being somewhat unusual, yet it still holds up well in your cherry picked period.

Over 10 years for your chosen period ABG has knocked the socks off all the indices you mention. You mention 9%pa for S&P, ABG on the other hand has returned over 600%+ (21.7%pa) !!!!

So my conclusion is yes if you don't understand your EMs and think they are all the same you might reach your conclusion using the MSCI EM index. If you know your way around though and realise that EMs are not a homogenous group and differ very widely there is good money to be made.

... And yes I've been invested in ABG throughout this time, so thanks for the confirmation of choice that it was preferable to US stocks even over your cherry picked period

Cheers

Fletch

You have picked one EM, Thailand. I agree the Thai market has shown great performance in the last decade (despite a major crash in 2008 – didn’t it go back to almost 400 [your picked time period]). A mirrior Thai Index fund has a passable Sharpe Ratio of .27 (positive, but still very low). Its Standard Deviation, however, is whopping 25.73 – meaning there is a great deal of volatility. As such, despite recent performance, it is still a risky investment that could go sideways – which appears to be happening now – if I were in it, I would take my gains and run. Once US interest rates rise (the low rates being a considerable reason some EMs have done well), EMs will tumble: China, Argentina, Turkey, Brazil, are all already in trouble, and probably Thailand will take a big hit as well.

The comment was on EMs in general, and many have crashed and burned. Looking at the MSCI EM index is a perfectly reasonable way to review EM performance without cherry picking a particular country. The people who presented asset allocations said in EM, not in Thailand. Actually, the EEM fund (which is the index fund) is over 88% in the main EMs, including almost 19% in China and 16% in South Korea.

Regardless of the time period or the new millennium, investors need to be compensated for risk. Emerging markets, too often, do not compensate investors enough for their risk and are subject to huge downsides when something goes wrong.

[fletchsmile]

Good cherry picking starting off with the boom year for MSCI emerging market, and a year before a big downturn in US equities and ending on a big downturn. Of course if I adjust the 10 year period the results are different. If I do Jan 1 2003 to Dec 31 2012 period the return on US equities is almost 9% - and that is not a diversified portfolio, that’s just the broad S&P.

Let’s do less cherry picking and something more relevant (as in what we would see in a summary report) – last 10 years,5 years, 1 year:

INDEX 1yr, 5yr. 10yr.

S&P 500 24.95 19.63 7.01

MSCI Emerging Markets Index (2.6) 14.79 11.17

MSCI EM Small Cap 1.04 19.58 11.97

Russell 2000 (US Small cap) 38.82 20.08 9.07

S&P 600 (US small cap) 41.18 24.35 10.65

S&P 600 Growth (US small cap) 42.69 22.71 11.53

Here are some of the risk/volatility numbers for related index funds:

FUND Sharpe Ratio Beta Standard Deviation

SPY (S&P 500) 1.29 1 12.08

EEM (MSCI) -.05 1.09 19.42

IEMS (MSCI Small Cap) -.11 .98 19.87

NAESX (Small Cap) 1.02 1.29 16.28

SLY (small cap) 1.16 .93 15.54

The extra return for the MSCI EM is not worth the added volatility to me (though the US small cap growth [what I invest in] beat the main emerging markets index in every period presented). The Sharpe ratio is also negative for emerging markets (for those who are not familiar with risk measure, a Sharpe ratio measures the returns relative to the amount of investment risk – the high the number, the better compensated you are for the risk). This is why US Small Cap is recommended over emerging markets, you are better compensated for the risk you take - it has similar returns with less volatility.

Note - I have edited this post several times due to chart formatting and some typos.

Actually it wasn't cherry picking, simply picking the first complete decade of the 21st century, as I happen to believe that the 21st century is a very different place to the 20th in terms of investment, for both US and Thailand

Now you've cherry picked you favourite period on the other hand, let me add a few more points:

(1) Anyone that compares the uses MSCI EM markets for appraisals really doesn't understand EMs. There are such a wide range of EMs and that includes many of the basket cases that drag down performance if you understand your markets. There are certain EMs I wouldn't touch with a barge pole

(2) On the other hand let's look at a better quality EM in a country where we live that is highly relevant to the thread. Take a look at Thailand. More specifically Aberdeen Growth: an active managed fund in this single EM (that isn't a basket case):

For your chosen period 1 Jan 2003 to 31 Dec 2012 the returns are:

1 Yr +53%, 5 Yr +122%, 10 Yr +611% or annualised:

1 Yr + 53%, 5 Yr +17.3%, 10 Yr+21.7%

Remember you cherry picked this period not me. The 5 yr period for Thailand obviously includes the GFC (as it does for US) and the Thai floods of 2011 ( a disadvantage for Thailand as you know well), so 2 out of 5 being somewhat unusual, yet it still holds up well in your cherry picked period.

Over 10 years for your chosen period ABG has knocked the socks off all the indices you mention. You mention 9%pa for S&P, ABG on the other hand has returned over 600%+ (21.7%pa) !!!!

So my conclusion is yes if you don't understand your EMs and think they are all the same you might reach your conclusion using the MSCI EM index. If you know your way around though and realise that EMs are not a homogenous group and differ very widely there is good money to be made.

... And yes I've been invested in ABG throughout this time, so thanks for the confirmation of choice that it was preferable to US stocks even over your cherry picked period

Cheers

Fletch

You have picked one EM, Thailand. I agree the Thai market has shown great performance in the last decade (despite a major crash in 2008 – didn’t it go back to almost 400 [your picked time period]). A mirrior Thai Index fund has a passable Sharpe Ratio of .27 (positive, but still very low). Its Standard Deviation, however, is whopping 25.73 – meaning there is a great deal of volatility. As such, despite recent performance, it is still a risky investment that could go sideways – which appears to be happening now – if I were in it, I would take my gains and run. Once US interest rates rise (the low rates being a considerable reason some EMs have done well), EMs will tumble: China, Argentina, Turkey, Brazil, are all already in trouble, and probably Thailand will take a big hit as well.

The comment was on EMs in general, and many have crashed and burned. Looking at the MSCI EM index is a perfectly reasonable way to review EM performance without cherry picking a particular country. The people who presented asset allocations said in EM, not in Thailand. Actually, the EEM fund (which is the index fund) is over 88% in the main EMs, including almost 19% in China and 16% in South Korea.

Regardless of the time period or the new millennium, investors need to be compensated for risk. Emerging markets, too often, do not compensate investors enough for their risk and are subject to huge downsides when something goes wrong.

I agree with a lot of your comments. The part I disagree with is that it's highly dangerous lumping all EMs together. They can be very different in nature, some running deficits, some running surpuses, some rich in resources some resource importers etc etc etc.

The way to approach EMs is understand their differences and invest in the ones (plural for diversification but not all) that fit your objectives and which you think make sense. Buying a basket thru an ETF or similar is in my view one of the worst things to do. This links in the the passive v active debate, where passive may make sense in US but often doesn't in EMs, smaller markets, less liquid markets etc

The reasons I chose Thailand as an example are:

(1) It's the most relevant country to this thread

(2) it's a market I understand and think has good prospects

(3) While I would agree for a US citizen that a large exposure to US equities may make sense to them, this is not necessarily the case for someone living in Thailand with their major expenses in Thailand. The volatilities above are all from a US perspective.

The cynic in me would also note that the people who largely promote this research and the figures you quote are the people who benefit the most from you investing in US markets. Same as the big passive fund managers skew their marketing to the advantages of passive vs active based on US data. They omit to tell you that some EMs you quite obviously shouldn't touch with a barge pole, so they lump together things which in my view shouldn't be.

US companies are much more homogenous. Same as the passive vs active debate, they assume you are an idiot who can't tell the difference between one EM and another or one fund manager and another. In reality a knowledgeable investor doesn't throw darts or roll dice. So the importance of these averages get overstated.

As an analogy if you took your NFL league there will be as many winners of matches as there are losers. If you understand nothing of the game like me, you have an equal chance of picking a team that finishes in the top or bottom half. But someone who knows the game knows there are different teams, and some not worth betting on. This is where lumping together averages of highly different investments falls down and is misleading, or saying why try and pick a winner in your NFL match as there will be as many winners as losers.

I can't say I've ever seriously considered Greece as a country to invest it, but have done and still do with Thailand.

(4) BTW Also not covered in your research above is the FX element. The numbers are very US centric and designed for US citizens in US. For someone living here the FX volatility creates a whole difference picture. Rebase your numbers in THB and the answers are very different. Not to mention the serious damage to returns due to the depreciation of USD vs THB in the last 10 years or so. For the depreciation of USD I also see that trend continuing and the world is a different place this century. That wouldn't be cherry picking either as the likelihood of a return to pre-Asian crisis levels is very very small.

So while your info and analysis does hold for US investors in the US who don't understand Thailand and EMs and pick investments at random or use ETFs, it is not necessarily so reliable if you understand Thailand, certain EMs, understand investments and live in Thailand.

Hence some balance is needed that it's nowhere near the black and white case you mention for many people on EMs or not.

Otherwise cheers for the point of view. The analysis is useful.

Cheers

Fletch

Edited January 27, 2014 by fletchsmile

[ExpatJ]

My take on paying mutual fund fees when you can pay far less fees on ETF- you have to be crazy.

Example:

Both funds assume an initial $10,000 investment and 8% annual growth. The time period is 30 years.

The low-cost fund is no-load and has expenses of 0.2% per year and has an initial value of $10,000. With annual expenses of 0.2% (growth of 7.8% = 8.0 % - 0.20%), the resulting fund value at year 30 is $95,184.

The high-cost fund has an initial 5.75% sales load, expenses of 2.0% per year, and a 0.25% 12b-1 fee. The initial value is $9,425.00 (10,000 - 5.75%). With annual expenses of 2.25% (growth of 5.75% = 8.00% - 2.0% - 0.25%), the resulting fund value at year 30 is $50,430.

The difference between these funds over 30 years is $44,753.

Another example:

A fund with a return last year was 6%, net of fees, which totaled 1.38%.

In effect the funds yielded 7.38%.

While 1.38% in fees doesn’t sound too high, think of it from another perspective. My friend paid 18.7% of his return (that being 1.38% divided by 7.38%) – in a good year – for management fees. That makes the fees sound a bit steeper.

Now consider in Asia where many managed funds are asking 2-5% in fees per year- crazy.

Edited January 27, 2014 by ExpatJ

[meand]

My take on paying mutual fund fees when you can pay far less fees on ETF- you have to be crazy.

Example:

Both funds assume an initial $10,000 investment and 8% annual growth. The time period is 30 years.

The low-cost fund is no-load and has expenses of 0.2% per year and has an initial value of $10,000. With annual expenses of 0.2% (growth of 7.8% = 8.0 % - 0.20%), the resulting fund value at year 30 is $95,184.

The high-cost fund has an initial 5.75% sales load, expenses of 2.0% per year, and a 0.25% 12b-1 fee. The initial value is $9,425.00 (10,000 - 5.75%). With annual expenses of 2.25% (growth of 5.75% = 8.00% - 2.0% - 0.25%), the resulting fund value at year 30 is $50,430.

The difference between these funds over 30 years is $44,753.

Another example:

A fund with a return last year was 6%, net of fees, which totaled 1.38%.

In effect the funds yielded 7.38%.

While 1.38% in fees doesn’t sound too high, think of it from another perspective. My friend paid 18.7% of his return (that being 1.38% divided by 7.38%) – in a good year – for management fees. That makes the fees sound a bit steeper.

Now consider in Asia where many managed funds are asking 2-5% in fees per year- crazy.

I am not sure if this thread is trying to focus on Thai stocks or not, I get the feeling it is not. Anyway, what this comes down to is are you willing to pay 2% to make 20%, or would you rather pay 1% an make 6%.

I will spare you the examples, I think that it is better left to the individual investor to find them, but I have noticed in my research on the Thai managed funds that the fees here are not only reasonable, but it can be far worthwhile to pay them. I am of course not making sweeping generalizations and saying that you can't lose by picking a fund, but I will say that much of the data I have looked at tells me that the well-managed funds here are well worth the fees - but again, no silver bullet. As has been said before though, I would approach this completely different in the US for example. Of course I would not pay the high fees for a managed fund there, and again, I'll spare the examples In short, when it comes to the fees for mutual funds, I think the Thai market deserves a closer look. The same research that applied in the US simply does not apply here.

[ExpatJ]

My take on paying mutual fund fees when you can pay far less fees on ETF- you have to be crazy.

Example:

Both funds assume an initial $10,000 investment and 8% annual growth. The time period is 30 years.

The low-cost fund is no-load and has expenses of 0.2% per year and has an initial value of $10,000. With annual expenses of 0.2% (growth of 7.8% = 8.0 % - 0.20%), the resulting fund value at year 30 is $95,184.

The high-cost fund has an initial 5.75% sales load, expenses of 2.0% per year, and a 0.25% 12b-1 fee. The initial value is $9,425.00 (10,000 - 5.75%). With annual expenses of 2.25% (growth of 5.75% = 8.00% - 2.0% - 0.25%), the resulting fund value at year 30 is $50,430.

The difference between these funds over 30 years is $44,753.

Another example:

A fund with a return last year was 6%, net of fees, which totaled 1.38%.

In eect the funds yielded 7.38%.

While 1.38% in fees doesnt sound too high, think of it from another perspective. My friend paid 18.7% of his return (that being 1.38% divided by 7.38%) in a good year for management fees. That makes the fees sound a bit steeper.

Now consider in Asia where many managed funds are asking 2-5% in fees per year- crazy.

I am not sure if this thread is trying to focus on Thai stocks or not, I get the feeling it is not. Anyway, what this comes down to is are you willing to pay 2% to make 20%, or would you rather pay 1% an make 6%.

I will spare you the examples, I think that it is better left to the individual investor to find them, but I have noticed in my research on the Thai managed funds that the fees here are not only reasonable, but it can be far worthwhile to pay them. I am of course not making sweeping generalizations and saying that you can't lose by picking a fund, but I will say that much of the data I have looked at tells me that the well-managed funds here are well worth the fees - but again, no silver bullet. As has been said before though, I would approach this completely different in the US for example. Of course I would not pay the high fees for a managed fund there, and again, I'll spare the examples In short, when it comes to the fees for mutual funds, I think the Thai market deserves a closer look. The same research that applied in the US simply does not apply here.

I understand if an investor has no choice- up until recently i could not invest in EU or US ETFs because i had trouble opening trading accounts in those regions (i have been an expat for eons)- so if i wanted a fund i had to buy these high fee local funds. Now I have just opened an etrade account in Singapore which allows buying of stocks/ETFs in US and will now be buying a portfolio of funds that will save me 10,000s of dollars in fees over a 15-30 yr period. But why buy a local fund with when you could buy an ETF covering Thailand with far less fees?

The other issue is that low fee index linked funds consistently and statistically outperform managed, higher fee funds.

[meand]

My take on paying mutual fund fees when you can pay far less fees on ETF- you have to be crazy.

Example:

Both funds assume an initial $10,000 investment and 8% annual growth. The time period is 30 years.

The low-cost fund is no-load and has expenses of 0.2% per year and has an initial value of $10,000. With annual expenses of 0.2% (growth of 7.8% = 8.0 % - 0.20%), the resulting fund value at year 30 is $95,184.

The high-cost fund has an initial 5.75% sales load, expenses of 2.0% per year, and a 0.25% 12b-1 fee. The initial value is $9,425.00 (10,000 - 5.75%). With annual expenses of 2.25% (growth of 5.75% = 8.00% - 2.0% - 0.25%), the resulting fund value at year 30 is $50,430.

The difference between these funds over 30 years is $44,753.

Another example:

A fund with a return last year was 6%, net of fees, which totaled 1.38%.

In eect the funds yielded 7.38%.

While 1.38% in fees doesnt sound too high, think of it from another perspective. My friend paid 18.7% of his return (that being 1.38% divided by 7.38%) in a good year for management fees. That makes the fees sound a bit steeper.

Now consider in Asia where many managed funds are asking 2-5% in fees per year- crazy.

I am not sure if this thread is trying to focus on Thai stocks or not, I get the feeling it is not. Anyway, what this comes down to is are you willing to pay 2% to make 20%, or would you rather pay 1% an make 6%.

I will spare you the examples, I think that it is better left to the individual investor to find them, but I have noticed in my research on the Thai managed funds that the fees here are not only reasonable, but it can be far worthwhile to pay them. I am of course not making sweeping generalizations and saying that you can't lose by picking a fund, but I will say that much of the data I have looked at tells me that the well-managed funds here are well worth the fees - but again, no silver bullet. As has been said before though, I would approach this completely different in the US for example. Of course I would not pay the high fees for a managed fund there, and again, I'll spare the examples In short, when it comes to the fees for mutual funds, I think the Thai market deserves a closer look. The same research that applied in the US simply does not apply here.

I understand if an investor has no choice- up until recently i could not invest in EU or US ETFs because i had trouble opening trading accounts in those regions (i have been an expat for eons)- so if i wanted a fund i had to buy these high fee local funds. Now I have just opened an etrade account in Singapore which allows buying of stocks/ETFs in US and will now be buying a portfolio of funds that will save me 10,000s of dollars in fees over a 15-30 yr period. But why buy a local fund with when you could buy an ETF covering Thailand with far less fees?

The other issue is that low fee index linked funds consistently and statistically outperform managed, higher fee funds.

That is what I was saying, I don't think that last comment you have made is true for Thailand - it may be true in the US of course. I think best to let other people do their own research, but to give you an idea, look at the long term performance of this fund. This is true pretty much across the boards here, as long as you don't include poorly managed funds, meaning all the good ones seem to do well against the index. Again, would you rather pay 2% a year to make 225%, or 0.5% to make -7% I don't think index funds are common here anyway, but perhaps you are talking apples, and me oranges

http://www.bangkokbank.com/BangkokBankThai/Documents/Site%20Documents/Mutual%20Funds/FundFactSheet/BTP_fs_en.pdf

[SpokaneAl]

The ongoing discussions concerning emerging markets solutions are very interesting. That said, I have different investment priorities.

After a decade or so of performing all the work necessary to determine when best to buy, and more importantly sell an individual security, I had had enough and moved totally to no load mutual funds, and slowly over time, morphed into holding the vast majority of my holdings in index funds.

So I will agree that with an emerging markets index fund in my pile, I probably have left some money on the table. However, in the last decade and a half or so I am all about the mix. I believe that for me, discipline and keeping the long view work best.

I religiously maintain my asset allocation, even as I carefully adjust it as I get older and more conservative. I re-balance when necessary and refuse to chase performance. Costs matter and my portfolio average annual expense ratio is .17%.

So, as always, the answer and the solution depends on one’s circumstances and goals. As I get older, keeping my pile is equally or more important that growing that pile. In that I am retired I now have much less interest in managing my assets day to day, but, in believing that this is not brain surgery, I see no reason to hand it over, either via active managed funds, or to a financial planner.

I keep it all in a single family of funds, am careful and disciplined about my spending and with half of our time spent in Thailand and the other half in the US, think that things have worked out pretty danged well.

Develop a long range plan, avoid jumping from one investment flavor of the month to the next, spend less than you earn and pack away the difference and you can have options and choices in life as you get older. And isn’t that really the goal for many of us?

Cheers.

Edited January 28, 2014 by SpokaneAl

[Furbie]

You have picked one EM, Thailand. I agree the Thai market has shown great performance in the last decade (despite a major crash in 2008 – didn’t it go back to almost 400 [your picked time period]). A mirrior Thai Index fund has a passable Sharpe Ratio of .27 (positive, but still very low). Its Standard Deviation, however, is whopping 25.73 – meaning there is a great deal of volatility. As such, despite recent performance, it is still a risky investment that could go sideways – which appears to be happening now – if I were in it, I would take my gains and run. Once US interest rates rise (the low rates being a considerable reason some EMs have done well), EMs will tumble: China, Argentina, Turkey, Brazil, are all already in trouble, and probably Thailand will take a big hit as well.

The comment was on EMs in general, and many have crashed and burned. Looking at the MSCI EM index is a perfectly reasonable way to review EM performance without cherry picking a particular country. The people who presented asset allocations said in EM, not in Thailand. Actually, the EEM fund (which is the index fund) is over 88% in the main EMs, including almost 19% in China and 16% in South Korea.

Regardless of the time period or the new millennium, investors need to be compensated for risk. Emerging markets, too often, do not compensate investors enough for their risk and are subject to huge downsides when something goes wrong.

I agree with a lot of your comments. The part I disagree with is that it's highly dangerous lumping all EMs together. They can be very different in nature, some running deficits, some running surpuses, some rich in resources some resource importers etc etc etc.

The way to approach EMs is understand their differences and invest in the ones (plural for diversification but not all) that fit your objectives and which you think make sense. Buying a basket thru an ETF or similar is in my view one of the worst things to do. This links in the the passive v active debate, where passive may make sense in US but often doesn't in EMs, smaller markets, less liquid markets etc

The reasons I chose Thailand as an example are:

(1) It's the most relevant country to this thread

(2) it's a market I understand and think has good prospects

(3) While I would agree for a US citizen that a large exposure to US equities may make sense to them, this is not necessarily the case for someone living in Thailand with their major expenses in Thailand. The volatilities above are all from a US perspective.

The cynic in me would also note that the people who largely promote this research and the figures you quote are the people who benefit the most from you investing in US markets. Same as the big passive fund managers skew their marketing to the advantages of passive vs active based on US data. They omit to tell you that some EMs you quite obviously shouldn't touch with a barge pole, so they lump together things which in my view shouldn't be.

US companies are much more homogenous. Same as the passive vs active debate, they assume you are an idiot who can't tell the difference between one EM and another or one fund manager and another. In reality a knowledgeable investor doesn't throw darts or roll dice. So the importance of these averages get overstated.

As an analogy if you took your NFL league there will be as many winners of matches as there are losers. If you understand nothing of the game like me, you have an equal chance of picking a team that finishes in the top or bottom half. But someone who knows the game knows there are different teams, and some not worth betting on. This is where lumping together averages of highly different investments falls down and is misleading, or saying why try and pick a winner in your NFL match as there will be as many winners as losers.

I can't say I've ever seriously considered Greece as a country to invest it, but have done and still do with Thailand.

(4) BTW Also not covered in your research above is the FX element. The numbers are very US centric and designed for US citizens in US. For someone living here the FX volatility creates a whole difference picture. Rebase your numbers in THB and the answers are very different. Not to mention the serious damage to returns due to the depreciation of USD vs THB in the last 10 years or so. For the depreciation of USD I also see that trend continuing and the world is a different place this century. That wouldn't be cherry picking either as the likelihood of a return to pre-Asian crisis levels is very very small.

So while your info and analysis does hold for US investors in the US who don't understand Thailand and EMs and pick investments at random or use ETFs, it is not necessarily so reliable if you understand Thailand, certain EMs, understand investments and live in Thailand.

Hence some balance is needed that it's nowhere near the black and white case you mention for many people on EMs or not.

Otherwise cheers for the point of view. The analysis is useful.

Cheers

Fletch

Yes, I intentionally left out issues such as FX and inflation rate (an investment killer in most EMs – though not so bad in Thailand at 2-4%) from the analysis so as not to confuse the core discussion.

On the FX rate, I have more faith in the stability of the US dollar than in the THB and emerging market currencies. In fact, once QE ends and US interest rates increase, the USD will increase in value significantly. So much so, that I did a contract renegotiation at the end of last year to put more of my base salary in dollars. So far, it’s paying off. I realize that non-US citizens need their own currency investments.

In my opinion, large companies earn significant overseas funds, and this helps adjust for FX rate risk. As well, these companies have significant positions in many emerging markets, which also creates more than enough EM exposure for me.

Good discussion indeed. It seems only here and in the food board can you have an intelligent discussion. May we all have high returns.

Cheers

[fletchsmile]

Yes, I intentionally left out issues such as FX and inflation rate (an investment killer in most EMs – though not so bad in Thailand at 2-4%) from the analysis so as not to confuse the core discussion.

On the FX rate, I have more faith in the stability of the US dollar than in the THB and emerging market currencies. In fact, once QE ends and US interest rates increase, the USD will increase in value significantly. So much so, that I did a contract renegotiation at the end of last year to put more of my base salary in dollars. So far, it’s paying off. I realize that non-US citizens need their own currency investments.

In my opinion, large companies earn significant overseas funds, and this helps adjust for FX rate risk. As well, these companies have significant positions in many emerging markets, which also creates more than enough EM exposure for me.

Good discussion indeed. It seems only here and in the food board can you have an intelligent discussion. May we all have high returns.

Cheers

On the FX I still think it's a significant factor, given the USD has lost about 20% ball park in the last 10 years or so.

As you say there may will be a pick up with QE tapering and other factors. I see this more as a short term upward blip on a long term downward trend for the dollar.

Dec 2003 was around 39.5 and Dec 2002 around 43, I don't see USD getting anywhere near that again. Vs the 45+ in 2001 that's pushing close to a 30% drop for people holding USD, and some nasty losses to factor in to returns.

BTW Forgot to mention also yesterday that the stats the companies quote and market often don't tell people either what happens if you start to mix the markets. In reality as mentioned it is never either US or EM.

EMs would have a place in my view (even for a US centric investor) just using Portfolio Theory/ CAPM/ EMH etc and all that stuff. In reality adding say 5% or more EM exposure to a US only portfolio would not only increase the expected return a bit, but would also likely decrease the overall portfolio volatility and risk of a US only portfolio.

i.e

US only = lower return than EM but lower vol than EM

EM only = higher return than US but higher vol than US

there will be a sweet spot where

US + EM combined = higher return than US only plus lower volatility than US only

I prefer Thailand (even as an EM) to the US but hold some US equities for that very reason in reverse.

Cheers

Fletch

Edited January 28, 2014 by fletchsmile

[fletchsmile]

Also worth considering where you think various markets are in terms of valuation when you are starting with your asset allocations. US equities in particular looks overvalued to me, so someone starting a new portfolio may want a little lower than they expect their long term average to be for rebalancing etc.

Not to say US won't go higher short term - just that it looks expensive and at some point will correct

http://www.businessinsider.com/goldman-market-valuation-is-lofty-2014-1

These would also affect that 10 year stats. Thailand/EMs had a tough time last year and look less overvalued.

Cheers

Fletch