for long term investments, why not go 100% emerging markets?

[xxThe_Lebowskixx]

assuming you won't need your money for 10-20+ years, why not just go for a portfolio of emerging market index funds/stocks. What is the likelyhood that these countries are not going to out perform for the developed countries?

[DcifrThs]

[ QUOTE ]
assuming you won't need your money for 10-20+ years, why not just go for a portfolio of emerging market index funds/stocks. What is the likelyhood that these countries are not going to out perform for the developed countries?

[/ QUOTE ]

this isn't how you need to think to construct a portfolio.

it is like saying, "what are the odds that a tech heavy portfolio won't outperform the S&Pindex over 20-30 years?"

those odds are probably pretty long (i.e. the tech sector will outperform).

but in risk adjusted returns, the S&P will vastly outperform the tech sector.

emerging markets have, and will likely continue to outperform in absolute terms their developing country counterparts. but, when you take risk into account, they do about the same (as does just about every asset class except commodities).

your goal should be to maximize your risk adjusted returns, not shoot for outperformance since the latter usually comes with a very large degree of risk.

you may then counter to say "but i just want to maximize returns."

well you can construct a solid portfolio and then tune it, with leverage, to whatever risk level you want (the return falls out of your risk target).

since drawdowns (downswings) hurt your portfolio disproportionately, reducing their severity and frequency massively improves your portfolio's performance.

Barron

[xxThe_Lebowskixx]

"since drawdowns (downswings) hurt your portfolio disproportionately, reducing their severity and frequency massively improves your portfolio's performance."

how do you do this without understanding the stock market? how do you know when to sell and when to buy? aren't most people better off buying and holding?

In my example, I was using a casual investor, not a professional.

[Fishhead24]

In this current environment, if one is buying they better be in for the longterm.

[DcifrThs]

[ QUOTE ]
"since drawdowns (downswings) hurt your portfolio disproportionately, reducing their severity and frequency massively improves your portfolio's performance."

how do you do this without understanding the stock market? how do you know when to sell and when to buy? aren't most people better off buying and holding?

In my example, I was using a casual investor, not a professional.

[/ QUOTE ]

first, to be clear, i'm talking about only passive investors. i don't think any passive investor should stick all their money in 1 (or 2) asset class(es), no matter what that asset class is. secondly, i'm assuming that all the investors i'm speaking about are only buying and holding. no market timing etc.

now, higher risk adjusted returns means fewer and less severe drawdowns.

emerging markets have about a .3 risk adjusted return (sharpe ratio).

this means that for every unit of risk taken, 30% of a unit of return can be expected.

by diversifying, you can increase that sharpe ratio (for a casual investor) to about .45 or .5 (depending on what you have access to)

this means that you will have fewer drawdowns and less severe ones and thus a much higher portfolio efficiency and performance.

Barron

[Fishhead24]

What BARRON just said.................

[xxThe_Lebowskixx]

have a good book recommendation about this?

[DcifrThs]

[ QUOTE ]
have a good book recommendation about this?

[/ QUOTE ]

i learned all this trhough classes & my former job, but my professor of math fin recommends "unconventional success" by david swensen (yale endowment manager)

Barron

[Tupacia]

Barron's right, you need to be thinking of risk-adjusted return and not total return. Heavy sector/country concentration may increase total return, but usually isn't worth it on a risk-adjusted basis.

[hawk59]

Lebowski,

First, you really can't be sure that emerging markets will outperform. The chance of really bad things like currency devaluations, socialization of industry, civil war, etc etc is all much higher and it might turn out 20 years from now the US market has outperformed emerging markets because emerging markets got hit with a bunch of bad things along the way. But you really can't know.

Second, if you have a long time horizon then risk is not volatility and anyone who says it is doesn't know how to think for themselves. It's better to have a lumpy 15% then a smooth 12% assuming that you have the stability to ride out the lumpy parts. So if you do assume that emerging markets will have a higher absolute performance then yes you would want to put your money there.