James Picerno has a post up exploring what the proper allocation to emerging market equities might be. He explores whether to go by market cap weight which would be 12% or maybe some other measurement that might yield a different number.
Here is a thought; the entire conversation needs to be thrown out and a completely different approach needs to be taken. Perhaps the title 'emerging' needs to be chucked. In going country by country in building a portfolio it seems logical that one would pick countries that have the best economic fundamentals. From there one could take volatility, not risk, characteristics into account in determining weighting and how to blend various countries together.
Based on various measures of indebtedness one could conclude that Brazil is in much better shape than the US or big Western Europe. Historically US based investors are pretty comfortable with 100% in US equities. I doubt too many people would be comfortable with 100% Brazil instead but maybe they should be.
Not really of course but if you believe the fundamental story is better in Brazil than the US then why would you have more US than Brazil? This becomes an interesting question. Not every healthy country is as volatile as Brazil, Norway as an example.
Instead of how much to invest in emerging markets the question should maybe change to how much each country, how much to countries more volatile than the US and how many less volatile (or maybe equally volatile).
The Sox lost last night but it was a good game. It was very cold the entire game but did not get colder as the game went on.
9 comments:
Maybe volatility should be second to fundamentals going forward for a country. This has served me well.
No indicator is perfect or works all the time. The 200 dma rule does not seem to be working or very useful now. You just have to realize that this can happen to any indicator.
"In going country by country in building a portfolio it seems logical that one would pick countries that have the best economic fundamentals. "
Why not pick countries with the best *valuation* rather than the best *fundamentals*? When attractive fundamentals are already priced in by the market, investment returns will *not* be attractive.
i believe fundies are primary over volatiliy sorry if that is not clear.
as far as the 200 dma it will only be exactly right in hindsight if teh market ends up going down a lot.
as far as valuation markets and stocks can stay cheap or expensive for years on end. how long were MSFT and WMT expensive? decades.
A mix of all suits me best. Fundamentals are obviously important, or hopefully should be, but various technical indicators can be invaluable when I enter or exit a position.
"...one could take volatility, not risk, characteristics into account in determining weighting and how to blend various countries together."
Regardless of my tactical/strategical preferences I love this way of thinking. Great idea!
Roger said,
"as far as valuation markets and stocks can stay cheap or expensive for years on end. how long were MSFT and WMT expensive? decades."
I disagree. MSFT and WMT were *not* expensive for decades, using valuation metrics that took expected long-term earnings growth rate into account (e.g., PEG). But once the market prices in attractive future growth rates, investment returns are no longer attractive even when fundamentals are. To value investors such as myself this point is obvious, but for some reason most people don't seem to get it.
- aagold
The so called "financial reform" allows banks to use 3% of capital to hedge funds, but only 6 to 8% of capital is equity.
This assumes they are not cooking the books with pretend and extend about delinquent loans. Actually I think the banks are insolvent.
So now the banks will only be allowed to put 1/3 to 1/2 their capital into risky investments and will continue to cook the books.
I am beginning to think our current leaders are good at containing the oil spill compared to running the economy and that scares me to death.
Roger,
Thanks for the article. I am such a newbie to this but it is encouraging that I am feeling like I am beginning to glimpse some understanding of this process and to imagine opening back up to taking some chances with some portion of savings -- instead of just hanging onto whatever value/$ I have in fear of losing it again. Slowly, carefully, learning. Many thanks. Kristin
The little guy thinks the sky is falling (or about to fall)
Congress has just given the financial banks the green light to keep the casino open.
I think we are more likely to go up than go down.
How did the bank stocks do after the "financial reform: compromise (sell out) was approved?
Since we're now completely OT, Roger just for your and your readers' info; nice new trading range screen/chart on Bespoke - could this be more useful than Yahoo's ?
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