Gyroscopic Investing

For those who buy international stocks to diversify, does anyone think emerging markets should be part of the mix? I think they may move differently from developed indexes because they have younger populations and more growth potential.

Thoughts?

They also tend to be more corrupt and politically unstable.

Also, many emerging market economies are going to run into trouble as they try to industrialize in a world of much higher energy prices.  Sustained high energy prices will affect emerging market economies in ways that few people seem to fully grasp.  For example, typically an emerging market economy will need a high level of capital spending in order to get the infrastructure in place that is necessary to participate in the world economy.  With tight credit conditions and a different ROI calculation based upon much higher energy prices in recent years, I think that in the future a lot of emerging market capex spending simply won't occur.

This problem of unforessen bumps along the capex road will further aggravate the corruption and political instability I mention above.

Lots of risk in that space.

I've got 33% of the stock part in EM. The points Medium Tex makes are probably valid but I wonder whether perfectly legal ways to give shareholders the slip are much better perfected in developed market stocks (eg dilution by employee stock options, daft M&A etc etc). Emerging market stocks have not been worse than developed market stocks up until now and I don't see a compelling reason why the comparison will tend to developed markets favor.  The relative affordability of commodities has been shifting in favor of the emerging markets and away from us. Brazil is hardly going to suffer from lack of commodities is it?
Also personally I think that EM (and small caps) are a clear case where a managed closed ended fund is likely to be better than an index etf. The correlation between the three equal parts of my stock allocation (lon:cty, lon:brsc and lon:tem) is not that close. As such I hoped that that would join the general "modern portfolio theory" type effects of the PP in general. I realize that this is all non-kosher for the PP.

Solar power will definitely work better in the tropics than in the UK .

My belief is that without growth into EM, the developing countries will stagnate. We can't build any more McDonalds in the US. But we can build more in India. We can only use so much timber in the US. But we can sell a bunch to China.

If EM fails, then I think Developed Nations' Indices will fail.

I like a 50-50 split between Vanguard's TSM and Vanguards Total International Fund (ex US). I believe offhand that gives me about 10% exposure to EM, which is under 3% of my total portfolio. That seems reasonable and probably won't do much either way.

Anyone overweighting emerging market stocks should first take a trip to some of those countries and see how they do things. Over the top corruption is the norm and that's not a way to become successful in business or win the trust of investors. I wouldn't overweight EM over developed countries. I would only do it as a speculation or keep it the same weighting as the total world index.

Indices wrote: For those who buy international stocks to diversify, does anyone think emerging markets should be part of the mix? I think they may move differently from developed indexes because they have younger populations and more growth potential.

Thoughts?

Here is how I divide my portfolios of 401K, IRA, and margin account.

401K Account = RS Emerging Markets K
IRA Account = US Increasing-Dividend Stocks
Margin Account = Permanent Portfolio

Odysseusa wrote:

Indices wrote: For those who buy international stocks to diversify, does anyone think emerging markets should be part of the mix? I think they may move differently from developed indexes because they have younger populations and more growth potential.

Thoughts?

Here is how I divide my portfolios of 401K, IRA, and margin account.

401K Account = RS Emerging Markets K
IRA Account = US Increasing-Dividend Stocks
Margin Account = Permanent Portfolio

Wait a second, your PP is a margin account?

That's weird.

LGrand85,

I like how you put that.

It seems to me that the international exposure through US stocks is plenty.  Consider for a second the size of Greece relative the world economy.  Our US stock market moves as of late have been 1) very volatile, and 2) hinged on the financial position of that country.  Don't tell me that you can reliably diversify your way into a better stock market when world markets are hinging on a country whose GDP is less than $350 Billion per year.
There are bigger pieces moving here than dividend vs non-dividend paying stocks, or foreign stocks vs domestic stocks with foreign factories and foreign customers. 

Now most of this probably has more to do with the Euro as a functional currency than Greece in and of itself, but if anything this should show the interdependence of the whole system and the futility of trying to optimize your stock portfolio away from future poor-performing countries & regions and towards ones that you think will perform better.  Barry Sanders never made it to the Superbowl because his team sucked.  Anyone betting on him getting there on his own while part of that time would have been a fool, completely misunderstanding the structural constraints to his success.

moda, Japanese stocks have lots of international exposure. Toyota and Olympus are hardly limited to Japanese consumers. Nevertheless those Japanese investors who didn't stay entirely with Japanese stocks are probably thankfull that they didn't. Stock market performance is a very complex slew of effects. Where the companies sell and produce the products is only part of equation.  If we get deflation we could see the same kind of 80% total return loss over the coming decades. Meanwhile emerging market stocks (or, as a turnaround, Japanese stocks ) might be booming.

stone,

Good point.  I'll digest further.