Mid Year Rebalancing Questions

[Belguy]

After a rather turbulent six months, some of us will be looking at rebalancing our portfolios and so I thought that I would start a thread where questions could be posted concerning asset allocations and rebalancing.

I will begin by asking about my emerging markets allocation which currently targets for 10 per cent of my overall portfolio. The sole investment is the Vanguard Emerging Market ETF (VWO):

https://personal.vanguard.com/us/Fun...T#hist=tab%3A1

One year return -20.76%, five year return -0.29%.

Do you consider this to be a reasonable target allocation in a reasonable investment taking the different factors, including past performance into consideration? What do you feel are the prospects for emerging market equities going forward given today's economic climate?

Thanks for any thoughts and assistance and feel free to post your own asset allocation and rebalancing questions on this thread.

[mrPPincer]

When I readjusted my portfolio earlier this year I added emerging markets as a separate allocation.
I was originally planning to go 10% as well, but for 2 reasons I went 5% instead, only one of which likely applies to you Belguy.

The first is dividend withholding tax, the tax paid in the non-US countries before VWO even sees the dividends, (don't know what that is but I'm guessing 10%ish on the the overall dividends), and this tax is unrecoverable for us Canadians (I don't know if US holders of VWO have a way to claim it).

The second, and bigger reason (probably not applicable in your case due to higher income level or RRIF space) is withholding tax, the tax paid when the dividends come across the US border.
I found that my SDRIF did not have room for all the stuff that should be in there, and I have my income low enough at this point that I can not use the foreign dividend tax credit most years, so I'd be hit with another 15% which makes the penny pincher in me 's toes curl.

I see no problem with that high an allocation otherwise if you are seeking extra amounts of low correlations than buying total market cap brings you but that's just one guy's opinion, to be taken with a grain of salt.

[Belguy]

Thanks, but I should have mentioned that this is in an RSP account (soon to be a RIF account).

[mrPPincer]

I'm at 90% equity, with probably 10-15 years or so before I fully retire, so my situation is different in that way too.
Another thing, that I didn't think of earlier.
If you're 50% equity, then 10% EM does seem like a lot, it's really 20% of equity, which seems closer to gambling territory to me.
Again, just one opinion.

[CanadianCapitalist]

IMO, your allocation to emerging markets is rather aggressive. IIRC, your allocation to equities is 50%. Assuming you have 20% allocated to Canadian stocks, your allocation to more volatile emerging markets is about 1/3rd of your international allocation (10 percent out of 50 percent stocks minus 20 percent Canadian stocks). Emerging markets make up 14% of world market capitalization, so your emerging markets allocation is double their weighting in world markets. Is there any reason for overweighting emerging market stocks? You need to think hard about this because you are not comfortable with volatility, yet you have over weighted more volatile stocks.

[Belguy]

I guess that I bought into the argument a few years back that emerging markets would be where most of the world's growth should come from in the following years. When I originally set up my allocation, I understood that emerging markets would potentially add volatility to a portfolio but, with risk comes potential reward. In other words, maybe a little bit of greed crept into my thinking here. Anyway, so far at least, I have experienced the added volatility without the accompanied reward.

My other international holding is an 8 per cent allocation to VEA which has had a similar recent performance history:

https://personal.vanguard.com/us/fun...T#hist=tab%3A1

[Financial Cents]

VEA seems like a decent buy around $30.

[doctrine]

No emerging market has had superior stock market returns over the long run as compared to first world stock markets. Economic growth and stock market performance are not necessarily linked. My emerging markets exposure is 0%.

[andrewf]

Why not keep it simple and use VXUS and VTI for your international ex-US and US equity respectively? Add in some XIU for whatever degree you want to overweight Canada and you're done.

[Sampson]

No emerging market has had superior stock market returns over the long run as compared to first world stock markets.

I don't invest in emerging markets for superior returns. I do it to diversify. Many studies have shown weak correlation of emerging markets with developed markets.

I agree with CC that you have far too much exposure to these markets. Right now might be a terrific opportunity to shift monies out of emerging markets and into markets equally hit hard over the past year.... Europe. Just think before you sell low and buy high (e.g. sell out of emerging markets and into North American ones).

However, I disagree that one's breakdown of allocations among different equity markets should be proportional to their size. I've never understood why it makes sense to invest more money in a larger market, nor have I seen an argument for why it is beneficial. I see it like a cap-weighted vs. fundamental-weighted index - cap-weighted is conventional, but not necessarily better.