Using EEM vs VTI

[gonetowindsurf]

If I understand correctly, the stock portion of the overall portfolio is for growth, (when that particular component is in vogue).
So why not just go where growth is, emerging markets and its etf, EEM?
Someone had posted a VTI/EEM split for the stock portion, but in looking at the returns of the 2, (at least lately) the EEM only portfolio is seeing better returns, admittedly there is more volatility.

[SmallPotatoes]

The only reason I've read against tilting or seeking is that when people catch on the value of the strategy diminishes. John Bogle, in his little book on commonsense investing, sites the number of Vanguard 'growth' and 'value' funds that fail to measure up to the S&P 500. Harry Browne also remarked on the simple efficacy of broad index funds.

That said, putting stock into typically more volatile funds shouldn't hurt the way the PP works, so long as your choices follow the broad market trends, hence the recommended S&P500.  I use VTWSX and have some SCV, and the combination seems to imitate The Market closely.

[foglifter]

If I understand correctly, the stock portion of the overall portfolio is for growth, (when that particular component is in vogue).
So why not just go where growth is, emerging markets and its etf, EEM?
Someone had posted a VTI/EEM split for the stock portion, but in looking at the returns of the 2, (at least lately) the EEM only portfolio is seeing better returns, admittedly there is more volatility.

The beauty of TSM index fund is it includes all sectors of the US market PLUS it gives a decent indirect exposure to both developed and emerging markets - if I'm not mistaken ~20% of S&P500 companies revenue comes from abroad. On the other hand, developed world became pretty tightly correlated with the US market so direct inclusion of emerging markets sounds quite reasonable. But dropping TSM altogether and replacing it with emerging markets only comes with a risk - what if we hit a long period of EM under-performing? Currency fluctuations would also become a factor.

Overall I'm OK with VTI/EEM allocation, the only question is why not using VWO, which covers much more stocks and is much cheaper. In my opinion EEM ER is way too high for a broad index fund.

Personally I'm using TSM with a tilt to EM value stocks, because a big chunk of emerging economies is concentrated in materials and natural resources so you don't get an exposure to a booming consumer and small business sector in these countries. 2008 was a good example: EM large caps fell much deeper than small and value indexes.

In the long run I think if you use EM as only a portion of your 25% stock allocation you can't get wrong easily. If you're with Vanguard VWO is a no-brainer, if you're with Fidelity you can buy EEM with no transaction costs. As far as TSM is concerned, both Vanguard and Fidelity now have plenty of no-fee large cap ETFs. Another good option for a TSM fund is VT (or ACWI in Fidelity).

[Reido]

I've wondered that myself...  I personally feel that international investing is very important in today's climate, given the fact that I expect the U.S. to have slower growth in the future as a result of several large macroeconomic issues.  (I'm making the assumption you live in the U.S.)

We have an aging population with little retirement savings, which will likely lead to higher taxes for social security, and impaired growth - possibly for 20+ years.  Recently, I have heard that 2016 will be first year of an explosion of social security claims, as the baby-boomers will be requesting those checks...
Europe looks to be in the same situation - possibly worse.
As a result, I don't think any of the current major world markets will do well for the foreseeable future, and if in the next couple years they do well - it'll largely be a fluke.

I'm looking to make VT (not VTI) and EEM my portfolio choices - but I want to weigh them each roughly equally, since there have been years (late 90's for example) when large-caps outperformed small caps.

Ultimately I think the international diversification can only help.

As for the other parts of the PP, I think T-bills for the cash segment and Gold will still hold true.

Also, I think that for now using TLT for long-term bonds will work well, as the U.S. is still viewed as being a safe-haven for investments and the dollar is a reserve currency in many parts of the world.  In the future, however, we may have to reevaluate how this portion is allocated.  The US may not be the Big Fish for too much longer...

[craigr]

Emerging markets can do poorly for long stretches when other funds do not. One author used to refer to them as "submerging markets". They are far more volatile than the US and you get currency risk to boot. EM funds hold countries like Brazil and Russia. If you think the US dollar has had problems in the past, take a gander at Brazil and other EM countries.

US investors should primarily hold US stock index funds. If you want to play the EM game, I'd do it with the variable portfolio. IMO.    

[Pkg Man]

I agree with craigr.  I used to have some EM and EFA in the stock portion but sold it for the S&P500.  I am a big believer in international stocks in general but prefer that they be in the VP.

[Reido]

I'd like to retract my prior post... It seems more prudent to only put a small portion in VT, as it contains 15% emerging markets and less than 50% US stocks.  It might even be better to keep that for the VP rather than PP - like craigr suggests

[PP4me]

I use S&P 500 indexes for these reasons:
SP500 is low cost
SPY's volume allows you to buy and sell without moving the market (less important in Permanant Portfolio)
SP500 companies are liquid and always priced efficiently so the fund can trade efficiently
SP500 companies are global providing international exposure
SP500 dominates the performance of the total market fund
SP500 is available in my 401k

Advantages I see in a total market funds:
the components don't change
broader diversification
less concentration of dollars in top 10 companies

Some reasons I don't like foreign funds:
high growth doesn't always equate to higher market returns
low volume in funds have high spreads and leads to abuse by your broker (been burned in ticker:VT)
low liquidity in world markets may cause the fund the same problem as above

There are advantages and disadvantages with each choice.  The most important point is that you choose one method and stay the course.  Don't use VT this year because you believe foreign funds will perform better and VTI next year because you think US small caps will perform better, and SPY the following year because you think large cap stocks will perform better.  Invest as if you cannot change funds for 5 years and you will chose the fund/funds that will be best for you.

[Reido]

[/quote]
Might be interesting to split the 25% equally between 12.5% small growth and 12.5% value and periodically rebalance the two back to equal weightings when sizeable differences became apparent. 

You'd encounter more volatility using small/value, but even if one say dropped 50% then relative to the total PP that's just a 6.25% move.
[/quote]

Clive, I considered this as well, but I have a few concerns...

There are long periods - particularly late in a bull market where small caps can underperform Large caps, despite their outperformance over a long period of time.

Take 1990-2000 for example, SCB yielded 12.37% versus 15.31% for S+P

In you had PP in the SCB, you'd have had 6.5% average for the decade vs. 7.17% in the S+P



Another issue is Value vs. growth...

I have no choice but to plead ignorance here...  It is very strange that growth stocks would underperform value - Growth stocks, I presume, are defined by higher than average PE's vs. Lower than average PE's for value stocks??

If that's the case, then growth stocks are trading at higher PE's presumably for a reason (people have high growth expectations) and they should be more volatile by nature.  I agree that the data I've seen support the argument that small cap value outperforms and is actually the more volatile of the two, but since I don't understand that, I just choose to compare the small blend and large blend.

Ultimately I would like to give a little more weight to the small caps, because they are usually underrepresented in most indexes.  I think I'll probably change to 12.5% SCB and 12.5% LCB.

I think that'll be an adequate compromise of growth and diversification.

I'd love to hear your thoughts.