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Plugging the Emerging Markets Portfolio Hole

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This past weekend, I was playing with one of my favorite tools, SigFig.com. You add all your brokerage accounts and it gives you an awesome consolidated view. You can read my SigFig review here.

There was one thing that stood out... I only had 7% of my stock portfolio in emerging markets. That may make sense for many people, but as I've written about before here, I am a firm believer in being diversified in stocks around the world. As you can see with the image on the right, I have 70% of my portfolio in the United States and another 15% in Europe. That doesn't leave a lot for the rest of the world.

Remember when BRIC (Brazil, Russia, India, and China) funds were popular a few years ago because those four large countries were expected to grow greatly in economic power in the coming decades? Well my Brazil, Russia, and India exposure seems to add up to %0.8 of my stock portfolio (which is 74% of my total portfolio). I've got a little more exposure in China at least.

So what do I do about this? The easy answer is Vanguard's FTSE Emerging Markets ETF (VWO). If you scroll down from that link you'll see that the ETF has all four of the BRIC countries in the top 7 holdings. With an expense ratio of 0.20%, I know that my returns aren't going to get eaten up by Vanguard's management.

It's not like VWO's 6% allocation in Russian equities is going to revolutionize my portfolio. My goal here isn't to focus my portfolio on those BRIC countries, but to diversify my holdings so that I'm not so dependent on the United States and, to a lesser extent, Europe.

Today's lesson is simple: check and make sure your asset allocation is what you think it is. It never hurts to revisit it every few months. I thought by buying Vanguard FTSE All-World ex-US ETF (VEU), I had my international exposure well-diversified throughout the world. I was wrong and this is where tools like those from SigFig can be extremely valuable (or you can go with the low-tech method of checking the fund for its diversification).

Last updated on February 10, 2013.

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11 Responses to “Plugging the Emerging Markets Portfolio Hole”

  1. jeff says:

    Strange that the tool splits out emerging from foreign equities. Emerging markets are 17% of your total international allocation which seems like a reasonable amount unless you really want to tilt more that way.

    How do the percentages in geographic allocation match up with the pie chart 70% United States vs. 59% Domestic Equities. Guess I don’t understand what the tool is trying to tell you.

  2. Lazy Man says:

    It is a little weird that they split out emerging markets from foreign, because emerging is a subset of that.

    I’m a very big believer in the global revolution, technology is making the world a smaller place. (That is in terms of being able to communicate and travel easier and faster, not in physical sense, of course).

    Combine this with the fact that, like most Americans, my income and real estate holdings are both 100% tied to the United States future. This is a huge financial exposure to one geographic region. When I see 70% of my stock holdings also in the United States, it only increases this dependency on the United States.

    For all those reasons, I’m a big believer in being overweight foreign stocks… more so than what most professionals would recommend. I might go as low as 40% US stocks. Today, I made a trade that brought my domestic equities down to 49%, and my emerging equities up to 15%.

    As you point out, I don’t get the discrepancy between domestic equities and the US percentages in Sigfig’s page. They are two different “widgets” and I just showed both because it was convenient. I still have an inconsistency with 58.75% of my equity in the US, but a pie chart that reflects 49% domestic stock.

    However you slice it, I’m better diversified today than I was yesterday.

  3. I currently only have 36% of the portfolio held domestically. Having a currency that appears slightly overvalued is a good incentive to look a bit wider :) However if you look at your true exposure, international stocks may not be the diversifier you think.

    Many of the companies in the US and EAFE indexes are selling to emerging markets already. Over here we get a lot of commodity exposure from the national index which of course is a good emerging markets play (one of the few redeeming features of our national index which at one time had a major position in a dotcom company).

    To be well-diversified you have to figure out who profit more from developing markets – GE, or a remote company with shady accounting that’s subject to arbitrary mood swings from a totalitarian government?

  4. Lazy Man says:

    That’s a great point Value Indexer. It is an increasingly global market nowadays. An investment in Apple or Google isn’t just an investment in the US – these large companies service the world.

    Viewed this way, I actually have more international exposure that I had thought about originally.

    There’s a lot of growth in remote companies with potentially shady accounting in totalitarian governments ;-). I’m kidding of course, but on a serious note, I don’t think that these are the kinds of companies that make the index funds. Some of the top holdings in VWO which I bought into were Samsung and China Mobile. Yes, they represent a small amount of the assets (the top 10 holdings were 17.8%), but I feel it is helpful to have exposure to companies like these rather than just Apple and Google.

  5. That’s a good reminder – I would rather own Samsung than Apple! Korea may be mis-classified as an emerging market since it shares a lot of characteristics with Japan (apart from the prematurely aging population that is). And China may be willing to allow good profits for outside investors if they want to attract capital.

  6. […] Man @ Lazy Man and Money writes Plugging the Emerging Markets Portfolio Hole – Today’s lesson is simple: check and make sure your asset allocation is what you think […]

  7. Nice tool and nice tip for the VFO exposure. One question however. Do these funds pay a lot of dividends? That would determine whether to make the investment in a retirement plan or in one’s personal portfolio.

  8. Lazy Man says:

    I pour almost as much as I can into my retirement plan and personal portfolio goes to emergency fund and real estate for the most part.

    Given this, I haven’t really looked into dividends of these investments. I’m sure it is trivially easy (Yahoo Finance or Google Finance should tell you) if you are interested.

  9. […] had long thought that it was true, but I found it left me with a whole in emerging markets. I was almost all invested in the US (70%) and had 15% in Europe, and about 8% in Asia (China/Japan […]

  10. […] Man @ Lazy Man and Money writes Plugging the Emerging Markets Portfolio Hole – Today’s lesson is simple: check and make sure your asset allocation is what you think […]

  11. […] For this reason, I've been looking to squirrel a few nuts away from my United States-based pile. Over the last few years, I've been investing in more general foreign funds. I then found that I had a hole in my portfolio by not having enough emerging markets. […]

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