Why I’ve Changed My Mind About Emerging Market Shares

hoan-kiem-lake In my book, Millionaire Teacher, I said “Don’t bother with emerging market index funds.They don’t perform as well as developed market products.”

That may be true. But I have since changed my tune.

Having a small allocation (10% or less) to emerging markets makes sense for two reasons.

One, is that they’re out of favour.

I’ve written the second reason here:

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Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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18 Responses

  1. Richard says:

    Hi Andrew,

    If you already own VWRD would this cover your small emerging market allocation?

    Thanks.

  2. Sukhbinder says:

    Hi Andrew,

    I have read both of your books (and they’re excellent).

    On the basis of the article, for someone in their mid-thirties with a balanced risk profile, what would you advise on what their asset allocation should be?

    Kind regards

    • Sukhbinder,

      Most of the indexes or ETFs that I recommended in my book already have exposure to emerging markets. If not, make sure you have no more than 10% of your equities allocated to an EM ETF or index.

      Cheers,
      Andrew

  3. Barry says:

    Hi Andrew,

    I am from Dublin, Ireland. I was introduced to your book Millionaire Teacher by a friend. I think it and yourself are fantastic and a wealth of knowledge, which I am glad you share.

    I am 35 and new to investing. I have an account opened with a low rate platform called Degiro. As I am from Ireland, Vanguard and iShares are not available to me. Can you advise what ETFS you would recommend for a European and would investing approx 200 euros monthly be effective.

    Thanks in advance,
    Barry

    • Hi Barry,

      I did not know that you could not buy ETFs as an Irish person. I’ve tried looking online to see verification of that, but I can’t find it. I assumed, like every other nationality non-American, you could find a brokerage allowing you access to ETFs that trade on, say, the UK market. Have you tried to open an account with TD Direct International? Have you exhausted all of the Irish brokerages and been rejected by them all?

      Many iShares and Vanguard ETFs are actually listed in Ireland, specifically for non Americans. Please tell me more. Why are Irish people not allowed to invest in them, when the rest of the world is? You have piqued my curiosity.

      Cheers,
      Andrew

    • Terry says:

      HI Barry

      I’m also negotiating the mind-field of investing in EFT’s from Ireland. I was looking to purchase Vanguard EFT’s from the New York exchange but obviously there is a currency risk but who knows how the next 20-30 years will pan out? Be great to chat about if interested?

      • Terry,

        Buying off the New York exchange carries no currency risk for you. Yes, the assets would be priced in USD, but whether they track USD depends on what you buy. Theoretically, you could buy a UK stock index off the NYSE. You would convert your money to USD to do so. But the underlying asset would represent what currency you really would be investing in. In this case, your money would reflect pounds sterling, and only pounds sterling. Here’s an example. Assume the UK stock market didn’t gain anything in 2017. But assume that that USD, relative to the pound, dropped 10%. In USD, as reported on your statement, you would show a gain of 10% on your UK stock index, as measured in USD, even though the UK market didn’t budge. You see? Zero currency risk.

        The big issue, however, relates to U.S. estate taxes. Don’t buy anything off a U.S. exchange. You can read more here: https://andrewhallam.com/2014/01/expat-index-investors-should-duck-u-s-estate-taxes/

        • Terry says:

          Thanks Andrew

          I’m using Degiro here in Ireland and the only Vanguard EFT’s they have listed in Canada are VANGUARD FTSE CANADA INDEX and VANGUARD S&P 500 INDEX ETF C.

          I think I will proceed with purchasing on the US stock exchange as with the amounts I am investing at this stage it will be a long time until I break the $60,000

          • Terry,
            That sounds like a good plan. By the time you get to $60,000, other ETFs will likely be available. As investors get smarter, the market steps up to meet the demand.

            Cheers,
            Andrew

  4. Barry says:

    Hi Andrew,

    Thank you for your prompt reply.

    Apologies, my message may be have misleading. You can buy all ETFS in Ireland. I was referring to accounts like Vanguard etc. are not available. The choice of stockbrokers are quite limited. They charge high fees and also the taxman likes a big slice of the pie.

    Have you any suggestions for Euro ETFS with a good return that can beat the taxman.

    Thanks again,

    Barry

    • Hi Barry,

      I can’t recommend that you try to dodge the taxman, if that’s indeed illegal.

      But I can tell you that there’s a wide variety of iShares and Vanguard ETFs that trade in Europe. Find a decent brokerage, and you will have full access to them. One that you could try is TD Direct International. Their fees are low. Americans pay less (they almost always do). But TD Direct International has a very reasonable fee structure. http://int.tddirectinvesting.com/

      If you want to read, in great detail, about a variety of ETF portfolio samples available for Europeans, I’ve published them in my book, The Global Expatriate’s Guide To Investing. http://bit.ly/globalexpat

      • Aoife says:

        Hi Andrew,

        Many thanks for your responses to the Ireland-related questions.

        Irish citizens seem to have a particularly bad time of it when it comes to investing, which seems unfair considering the number of companies that benefit from being domiciled in Ireland to avail of tax benefits themselves. Sadly these benefits are not passed on to Irish citizens and income/gains from shares/ETFs are taxed at 41%.

        I’ve been using DeGiro too (https://www.degiro.ie/) and it seems to be the best value for regular investors investing relatively small amounts.

        Thanks for running the blog, Andrew. Its a great source of information and your books were a great read.

        Kind regards,
        Aoife

  5. Barry says:

    Hi Andrew,

    Thank you for taking the time to respond and also your advice, which I will take on board.

    I enjoy reading your blogs and will definitely be purchasing your second book as I found your 1st one so helpful.

    Many thanks & good health to you and your family.
    Barry

  6. Tom says:

    Hi Andrew,

    I’m new to investing. I have read both of your books and found them really helpful. Thank you for writing them and sharing them with us readers. I’ve decided to go for a Couch Potato portfolio with 30% bonds and 70% stocks. I’m 27 by the way. I got a few questions I’d like to ask you.

    1. Do I change the percentage allocation once I reach 40, 45 to 40% bonds / 60% stocks, 45% bonds / 55% stocks? You didn’t mention this in your books so I suppose I shouldn’t and just stick to 30/70 for the rest of my life. But I’m not sure so I thought I should ask you.

    2. I want to further divide my stocks and bonds into international and Singapore. For the stocks component, 10% Singapore and 60% international. But I don’t know how to divide the bonds component. I think I should base on the percentage of Singapore bonds or Asian bonds in the global bonds market but I don’t know the figure. Can you advise me on this?

    Many thanks,
    Tom

  7. Oliver - British Global Nomad - in Singapore says:

    Interesting article. I was surprised to see you changing your mind on Emerging markets. I’ve actually been moving more and more towards a developing world only approach, mainly due to 3 factors:
    1 – I’m lazy and only want 1 equity ETF (so I guess I wouldn’t get the re balancing advantage?)
    2 – Expense ratio’s go up disproportionately when there is a developing world element
    3 – From what I can see, the best most successful companies in EMs list on established stock markets (look at the Chinese firms on HK, NYSE etc.)
    4 – my work is linked to EMs – that’s enough exposure for me!!

  8. Jason says:

    Andrew,

    When you wrote this article emerging markets were indeed cheap and anyone who took your advice at the time would have done very nicely. They are no longer cheap by comparison. Having read your books I know you often emphasise the invest and stay invested mantra highlighting the dangers of trying to time the market. My question is, given current valuations would you still recommend that investors hold a small part (say 5%) of their portfolios in emerging markerts? I don’t have EM exposure at the moment and am sitting on the fence as to whether I should enter now, or given the greater likelihood of volatility and correction remain fully invested in the developed economies

    Thanks (hope to see you in Dubai in Jan)

    Jason

    • Hi Jason,

      I don’t alter my strategies based on what’s cheap and what isn’t. I hold a globally diversified portfolio and I don’t speculate. I just rebalance once a year back to the original allocation. I previously had a bias agains EM markets. But I’ve since realised that doing so is silly, and that they should represent about 7 percent of a total portfolio’s equity portion because that would be in line with global market capitalisation. When I usually write about what’s “cheap” or “expensive” I’m never suggesting that people avoid these sectors. If anything, I just keep trying to emphasise that no sector should be shunned (cheap sectors are often shunned because they have poor recent track records).
      As for emerging markets being expensive (not that this would make anything different) I’m a bit confused about where you have received your measurement. As of October 1, 2017, the CAPE ratios for emerging markets were still almost half what they were for the U.S. market. The CAPE ratio for emerging European stocks was about one-third of what it was in the United States.

      My best advice, however, is not to think about valuations. Just build and maintain a diversified portfolio of ETFs and rebalance once a year. In my view, if you’re spending more than 30 minutes a year thinking about your investments, that’s too much time.
      http://www.starcapital.de/research/stockmarketvaluation

      Cheers,
      Andrew

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