Jason Zweig put up an article on the WSJ the other day called Placing Your Investment Chips in the Right Countries. Well that sounds interesting especially as Zweig seems to be more of a broad based index believer.
The article was not so much about country selection as about not avoiding Japan, the UK and France. Zweig notes that emerging markets, more specifically BRIC related, have received the lion's share of investor dollars going into mutual funds such that the exposure is out of whack with the reality of global market capitalization.
Most of the article focuses on asking a reasonable question about whether people have too much in emerging market funds and stocks and perhaps they do but the article concludes with an unnecessarily snarky rhetorical question that I think distracts from the important point he is trying to make. In favoring emerging markets countries Zweig wonders "What insights do you possess into the global economy that hundreds of millions of other investors have somehow overlooked?"
It seems to me that "hundreds of millions of other investors" overlook all sorts of things continuously and repeatedly. Further the tone that I think he takes assumes no forward looking analysis which I believe is common to passive indexing.
Perhaps it is true that picking the correct country is difficult (or maybe not but we can worry about that on a different day) but I think I am on to something with the notion of figuring out what to avoid. Japan is down a zillion percent (slight exaggeration) since peaking a little over 20 years ago. We've watched this unfold right before our eyes all that time. That is the past and maybe the future for Japan but today looking forward how many times are you going hear or read how much trouble the UK might be in before you conclude that reducing that one might be a good idea?
At the sector level any time a big US sector grows to be 20% of the the S&P 500 it is a warning that trouble could be coming, even more so on the rarer occasion that a sector gets up to 30%. There are many behaviors and thought processes that manifest themselves in market prices that repeat in cycle after cycle.
The willingness to believe there is nothing to any of this is a little hard for me to understand. Anything talked about in this context is certainly not able to provide a guarantee of success but watching the equity portion of my portfolio cutting in half without make any effort to protect what I've accumulated is unacceptable. "Any effort" might fail but how does some not even try?
With regard to choosing individual countries if you know that a given country is a mess and that country features prominently in some broad based index fund you'd want to use how do you not invest in such a way as to avoid that country.
A few days ago we learned that iShares had filed for a New Zealand fund. Yesterday it was reported that iShares has also filed for Egypt, Ireland, Russia and the Philippines. A couple of these are me too filings and a couple would be new. I think there are three Egypt funds filed for and someone will list one eventually. Between the various country funds and regional funds that exist it is almost possible to recreate EAFE and exclude Japan and the UK.
That isn't necessarily a practical solution but it makes a point of the versatility that the ETF industry is capable of offering toward the aim of portfolio construction. Buying broad based indexes and holding on no matter what has caused a serious bump in the road for a lot of people. How many years of the typical person's investing career is devoted to accumulation and growth versus preservation and income? A bad ten years may not be too far out of the ordinary but someone who is 60 years old today could be facing some very uncomfortable decisions. If a bad ten years becomes a bad 15 for the broad indexes that could be enough to be truly game changing for an entire generation.
How willing are you to bet your financial future on the expectation that broad based indexing will turn things around for this decade? What will the consequence be if you are wrong?
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35 comments:
Interesting post Roger.
On a similar note, I am wondering if you own any "proxy stocks" for Israel, Canada and Sweeden or if you just use the country shares EIS, EWC and EWD.
As always thanks for the insightful work.
L.D.
we maintain a portfolio of 40-45 holdings for most clients. six of them are ETFs--none of them single country funds.
we use a couple country funds in some smaller accounts where 40-45 holdings would not be practical due to commission drag.
Some of the single country etfs are illiquid and it is hard for the small investor to keep up with all the countries. There is a lot of effort in the work you provide.
I still like VWO for broad exposure to smaller countries regardless of the problems.
Staying in the market through the ups and downs is what I view as the bigger problem. I do not trade a lot, but I do not believe in staying invested when bear market warnings are apparent.
I do not think buy and hold will work this decade, especially not the first half of the decade.
Speaking of Japan (kind of), could any of you comment on the rumor Toyota is coming out with a new model called "The Black Swan"?
"...but watching the equity portion of my portfolio cutting in half without make any effort to protect what I've accumulated is unacceptable. "Any effort" might fail but how does some not even try?"
Because the tax burden caused by selling is a PERMANENT loss if you are a taxable investor while the price flucuation of an index is temporary. Especially onerous are the tax losses in short term gains taxed at the highest combined marginal federal and state tax rates. Most tax efficient investors place passive equity index holdings in the taxable portion of their portfolio. Buying and selling is only done at the margin to maintain an appropriate allocation to stocks and bonds.
I am equally amazed at how you consistently ignore the effects of taxes on returns. I am going to guess that most of your client's accounts are tax sheltered and/or you have very few high marginal tax rate clients and that is why you dismiss the adverse effects of the tax drag.
I for one don't seem to be any worse off for not "trying" to sell before a fall and then subsequently "trying" to guess when to get back in.
Just another perspective.
the sell and buy mechanism is pretty simple; 200 DMA not random guesses.
a lot of our defense is buying a double short ETF with only a couple of sales.
i;ve outlined this a zillion times and the tax bite is minimal.
bigger picture a 15% tax on the gain versus a 50% hit to the portfolio? i'll pay the tax
depending on where you live, gains from stock trading can come close to 50%. 15% is only for long term gains.
And the 15% is soon to be 20%, a 33% increase. And that ignores state taxes.
I was just offering a reason why someone wouldn't do anything in the face of market flucuations.
Hi Roger: as per the comment above, I am wondering what you use to get exposure to Sweeden, which I seem to remember you wrote about as one of your "foreign" investments both on this blog and on seeking alpha...Other than ericcson it seems there is very little avaiable for the U.S. investor...or perhaps I am missing something....
THank, Bruce
Roger asked, "How willing are you to bet your financial future on the expectation that broad based indexing will turn things around for this decade? What will the consequence be if you are wrong?"
I'm not betting anything. That is speculation. I am 100% passively INVESTED in equities. What do you mean by "will turn things around?" I accept equity values rise and fall. My concern is how much income equities generate in the form of dividends.
I don't understand "consequences if you are wrong." I guess the worst case scenario is that stock values go to zero and then they pay no dividends. What happens then? I don't know, but cash in a brokerage house is unlikely to help either.
I do understand that those who are "betting" with their retirement cannot afford to make mistakes and that the consequences of an incorrect bet could be dire. That is why it is important to have a budget, live within your means, and INVEST according to your need, willingness, and ability to take risk.
I guess that since you use the word "bet", you acknowledge what you do is basically gambling.
For those in retirement and face the prospect of outliving their savings, they should seriously consider transferring their longevity risk to someone else in the form of a single premium immediate annuity.
I recommend Jim Otar's "Unveiling the Retirment Myth" for a different perspective. It can be found here:
http://retirementoptimizer.com/
I have no connections to this site or Mr. Otar and I am not an insurance salesman.
i use an industrial stock that trades as an ADR on the pinksheets that has plenty of volume
anon 8:52, actually my use of the word bet modifies what the hold on no matter what crowd will do. for the last decade domestic indexers are down 24% performance wise. you comment about dividends; are you an indexer or a stock picker? if your are an indexer then you don't manage your dividends, the index pays what it pays, if you are a stock picker do you never sell something you own? assuming you do occasionally sell a stock you own are you saying you immediately "have" to buy something to replace it?
sorry meant to also mention that another decade of flat or negative index results could be a deathblow to many retirement plans as noted in the post which is why I do what I do; was not willing to settle for down 24% on the decade and still not willing to settle for that in the new decade.
The dividend steam from stock indices (domestic and international) is sufficient for me. I have no superior ability to choose stocks, nor does anyone else. What I do have are modest expectations. The only ones down 24% in a decade are those who purchased at the highs and only have the S&P 500. Other investment classes have done better. On the other hand, those who have been patient, have kept costs low, and have avoided the fear/greed that emotions produce have been handsomely rewarded over many decades. Heck, I don't even remember much about the markets in 1987 except that at the time there was a whole bunch of hand wringing and people crowing about their ability to get out before the fall. Looking at a chart now, it is almost meaningless. It certainly has had no adverse impact on me. Maybe this time is different, maybe its not. I don't know and neither do you.
By the way, I think a realistic expectation for a 50/50 portfolio is about 3.5% real return for the long haul. That gives you some perspective of where I come from.
Hmmm..
That would probably be either atlky, eluxy or sdvky
Since you have shared other holdings in the past, I am wondering why you do not want to share this....no pressure and thanks for all you do :)
Bruce
anon 9:26, you say the divs off the broad indexes are sufficient, ok.
With very few exceptions, regardless of price the SPX has yielded very close to 2% over the last ten years.
Making no attempt to imply or guess your portfolio size, $1million invested broadly in indexes would pay about $20,000. Five years of stagnation means the broad index will still pay $20,000 five years from now. Assuming a 3% rate of inflation for those five years that $20,000 will lose 15.92% of purchasing power. Given the role healthcare expense plays in our finances, 3% could be too conservative (that one is debatable of course). I think the gamble being taken by broad based indexers is huge.
Bruce, I've mentioned the stock countless times and based on the way you are asking I will just say we are not handing out fish here.
Time and again I see references to Japan, often with a suggestion that the US/UK/Europe/China/Asia markets are about to repeat its last 20, miserable years of declines in land and stock market values.
Each time I'm confused as to how people can mistake Japan in the 80s to any other industrialized nation. Ever.
At the market's peak in 1991, all the land in Japan, a country the size of California, was worth about $18 trillion, or almost four times the value of all property in the United States at the time.
Maybe Dubai is the new Japan, although its stock market surely isn't nearly as over-inflated. Maybe Japan was more like Dubai's property and the Dot.com booms combined?
I have no inclination to put any money into Japan's markets (yet), and in the UK I am choosing to buy Funds that are heavily weighted in non-cyclicals that pay dividends which will be re-invested.
Long, long-term (measured in decades) I probably wouldn't be much better off either way. But it helps me sleep nights.
anon 9:26--while I don't agree with your strategy, I certainly admire your discipline and conviction. My weakness is that everytime I read something persuasive, I want to change my approach. Bogleheads? You bet, they're right! Indexers? Of course. Technical analysis? Easy.
I don't agree with Roger's approach 100% either, but I've sure learned a lot from him that I've incorporated into whatever discipline I still have.
Roger, the logic of the choice would be no different if the tax were 50% instead of 15% because the tax is only on gain whereas the portfolio loss is total.
If the old saw that "half a loaf is better than none" has merit then how much better would 64% to 85% of the loaf be (after tax)?
It is possible to go broke taking profits if they are offset by losses and friction but considering that it would take nearly a 67% gain in portfolio value to recover par after a 50% total loss the logic of selling before that point becomes rather compelling; provided it is disciplined.
Frankly it's difficult for me to avoid top bracket these days but tax analysis rarely rises above a tertiary factor in buy discipline and rarely makes it above secondary when selling even now; e.g., tax status might dictate specific lot rather than FIFO or a choice of one rather than another comparable asset but, then again, might not.
Shorter version: Taxes happen when you make money; the alternative is less desirable.
A quick check of today's WSJ shows 5 dividend increases and 1 decrease for an average quarterly gain of 9.75%. This has been the trend recently. I would question your stagnant dividend argument. Furthermore, I am not exclusively invested in equities. It is the combination of dividends and interest that is sufficient for me.
My portfolio size is large. I attribute its size to these factors:
1) steady savings especially when young,
2) living way below my means.
3) no debt,
4) little to no trading,
5) tax-efficiency,
6) being born in and living in the United States,
7) modest expectations of the market,
8) a high quality, good value education (B.S. Engineering Purdue University),
9) military service and the good fortune to see how good things are in the United States and how much of the world lives in misery and squalor, and finally,
10) probably most importantly, good luck. I have lived in decades of prosperity. Prosperity is relative. Hard times here would still be considered prosperous times in many other parts of the world.
Having read your blog on occasion, I am pretty sure that you would agree with some of what I say, especially living modestly. Where we differ is that you believe active trading will lead to a more successful outcome than passive investing. You may be the exception Roger, but the masses have shown that trading is a path to below market average performance. Even the so called "pros" blow up with regularity.
go to bigcharts.com, put in SPY, click on Advanced Chart. when that loads chnage the time to decade, and the lower indicator to yield and you will see very close to 2% the vast majority of the time. i stand by the comment.
trading can lead to blow ups? yes. pros can blow up? yes. the context of the post is mostly avoidance. avoiding sectors that are obviously too big and avoiding countries that are obviously on precarious footing.
I thought the fish things was more Norway than Sweeden
:)
Bruce
2% of 1100 is a heck of a lot more than 2% of say 200 from many years ago. That 2% yield from many, many years ago has grown at the same rate the value of the market has increased. I am not sure why you would expect the dividend yield to increase over time. If you are trying to make the arguement that the gross amount of cash generated from dividends has not changed over time, then you are mistaken. The major cause of the variation in dividend yield is the value the market places on that stream of cash. I believe this is where investors like B. Graham and others place logic over emotion. They look at competing investments and as you say the consequences of being wrong. Buying stocks when yields go up and values are down is nothing more than getting a good value for your money.
"avoiding sectors that are obviously too big and avoiding countries that are obviously on precarious footing." It is difficult to argue with your logic. Congratulations on having figured it out!
Common sense works best.
Too many investors are too smart, by half.
T
"avoiding sectors that are obviously too big and avoiding countries that are obviously on precarious footing." It is difficult to argue with your logic. Congratulations on having figured it out!
Sorry, but you really are annoying. Just curious, if you are die-hard Boglehead passive equity indexer, then why even read and comment on this blog. There is nothing of value to you here. Are you trying to save us active "traders" who just don't see the error of our ways.
To your point above, you are really being obtuse if you cannot see that certains signs often point to avoiding certain sectors or countries, and it isn't rocket science, just a little common sense mixed in with an understanding of market cycles and history.
Tech was at 30% in 1999-2000. Didn't take a genius to figure out it was a probably a good "bet" to avoid or underweight tech. Ditto for financials in 2007 at the height of a generational credit bubble and 25% market cap on that sector. Roger posted in REAL-TIME over and over and over the reasons to underweight tech. It isn't 20/20 hindsight here. Japan was at 70x earnings in 1989. Again, understanding of history says forward returns from that point not likely to be good.
Sorry, but your type really just annoys the hell out of me. So sure of yourself and your investment philosophy and process. I'm not a super active trader but I am an active "investor". I've got core allocations to Fairholme Fund and Berkshire Hathaway. No guarantees...life doesn't work that way...but all evidence would suggest those 2 positions will outperform the S&P 500 over the next 3-10 years.
Anyways, you've got your dogma and I'm sure you will stick to it.
hearty chuckle
One more point, and this is really only applicable if your mind is at least somewhat willing to entertain other ideas.
Grab a cup of coffee, set aside 5-6 hours and download every single quarterly letter from Jeremy Grantham since 1999-2000, and start reading.
If you can really tell me with a straight face that it is absolutely impossible to identify mispriced asset classes and bubbles, then I just don't know what to say.
After having my gas pedal stick, I traded out of my Toyota and into a Volvo. Then I went fishing and accidentally left a mackarel in the car. Now the car stinks of fish, and my car looks overvalued. But at least I know how to fish (or not)
B. Springsteen
This is from Zweig: "42% in the U.S., 45% in developed foreign markets, 13% in emerging markets. Take those numbers as your base line. If you keep more than that in the U.S. and less in developed foreign markets, your bets are skewed. What insights do you possess into the global economy that hundreds of millions of other investors have somehow overlooked?"
My insight would be that foreign countries take taxes out of dividends. If you invest with an IRA that would be an additional burden. Some countries tax more, some less, but I would say the average drag would be around 0.5%.
When we look at foreign developed markets, sometimes it's hard to see too many structural differences from the US in someplace like the UK. The difference in an IRA would then be the tax on dividends, if any. That would mean US 6% versus UK 5.5%.
Roger,
what you have put into this blog along many great participants are financial golden nuggets hidden into narticles, firefighter stories, sport, trucks, places, parks, pictures, ect. Many of these participants are RW, MikeC, Seg, SD, BillB, clive and many others. If you take these golden nuggets I think that it is very difficult to get into trouble. Let me state one point: you mentioned that if a sector becomes larger than 20% in the S&P or even bigger than that sector must be avoided. The Energy sector in july 1 2008 was such and COP one of Buffett purchases was around $91. I think that Mr.Buffett purchased it around 85. Today that sector has come down a bit and so the price of COP. So, Roger, want, and must thank you for your golden nuggets. I think that you can click more than 10% a year if you donot overtrade(one of other nuggets) and pick your batting.
Best,
Jeff from Milan, Italy
"Sorry, but you really are annoying. Just curious, if you are die-hard Boglehead passive equity indexer, then why even read and comment on this blog. "
I thought Roger welcomed discussion. All I did was explain my answer to Roger's question, "...but watching the equity portion of my portfolio cutting in half without make any effort to protect what I've accumulated is unacceptable. "Any effort" might fail but how does some not even try?"
I like reading this blog because I like Roger's opinions on lots of different topics. He is successful with market timing, sector selection etc. Bravo. I admire his abilities. I also like hearing his views on frugal living and other aspects of the economy beside investing.
"Sorry, but your type really just annoys the hell out of me. So sure of yourself and your investment philosophy and process."
Typical response from someone who doesn't want to address an argument based on fact. Who is the one with an open mind? Why the hostility?
Roger made an honest mistake by saying 2% dividend yield over the years has not enabled an investor to have an increasing stream of cash. All I did was to point out his error.
"If you can really tell me with a straight face that it is absolutely impossible to identify mispriced asset classes and bubbles, then I just don't know what to say"
I do not have the ability to identify mispriced asset classes with any consistency.
It is easy to identify mispriced asset classes and bubbles...in hindsight.
a link from November 28, 2005 warning of big trouble in the financials
http://randomroger.blogspot.com/2005/11/inverted-curve.html
shortened if you need;
http://bit.ly/agy8Xq
Hey MikeC,
You said, "I've got core allocations to Fairholme Fund and Berkshire Hathaway. No guarantees...life doesn't work that way...but all evidence would suggest those 2 positions will outperform the S&P 500 over the next 3-10 years."
Here's what Warren Buffet says,
Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.
The most important quality for an investor is temperament, not intellect.
Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.
We continue to make more money when snoring than when active.
The only value of stock forecasters is to make fortune-tellers look good.
My favorite time frame is forever.
I just wanted to point out a fact:
dividends (and earnings) grew sharply in the decade. not that it mattered that much as a percentage of total return.... but for the record, the dividend yield went from well under 2% to about 4% at the market low in March 2009.
Some sectors are hitting new all-time highs in dividends paid -- with financials greatly affecting the overall S&P 500s dividend 'growth'.
http://www.etfreplay.com/blog/post/2010/02/03/SP-500-Dividends.aspx
Roger,
W/O taking too much of your time, can you please educate me on how to plot the 200 DMA using Big Charts?
type SPX in the quote box and click Advanced Chart. When that loads click "indicators" in the left sidebar and the first thing listed is moving averages. Change the number 9 to 200 and select SMA from the first drop down
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