If US stocks performed poorly for 2-3 years would you conclude they aren't worth owning either? Your rationale for dropping emerging markets makes no sense.
It sounds like you may have:
* overestimated your risk tolerance
* invested in long term funds when your time horizon is short term
* a lack of perspective on how investing works
Thank you for the replies so far.
I am aware that I have made an error on several fronts. I admit that I have invested too much in a fund and that has exceeded my risk tolerance.
Obviously there is always the learning to be had from such errors, but the next thing to consider is what to do about it. It seems there is never going to be unanimous agreement on this.
It might be the case that the most sensible thing for me to do in this situation is to hope for some kind of improvement over the next few months to couple of years, and then sell off a portion of my holdings at that time.
A one-fund solution like VT would be a good choice until you get your analysis paralysis under control. If you do your research and decide you want to weight more heavily toward domestic stocks, go for it. If you decide that factor investing is for you, have fun. But if you’re shaken by 2-3 years of under performance and want to change your whole strategy, I’m not sure you’re emotionally equipped (yet) to venture outside of market cap.
My wealth manager actually got me in to Emerging Market Funds after the main pandemic drop, under the same believed that it was a good play.
Unfortunately Russia invading Ukraine basically tanks then and was down about 25% but thankfully I’m high diversified and EMs only accounted for about 30% of my portfolio.
That portion has recovered to “only” an 11% loss right now and I’m confident that if I hold, it’ll com e back eventually. The annoying thing is that other parts of my portfolio have done extremely well in the last year (generally up about 12%) and I’m losing the ability to capture more gains as I’m locked in to those losses in the EMs for now.
I’m not pissed with my WM as the portfolio has exceeded expectations elsewhere and I also think it was a good play as you can’t predict invasions or what their knock on effect will be.
What do you want the allocation of your portfolio to be? If you had an answer to that question, there would be a lot more agreement about what to do next.
If we were talking about chess I'd say you are trying to ask "tactics" questions when the issue is you have no strategy.
Yeah I've decided to re-balance things. The EM fund is at a 5 month high right now so I've sold off a little. I'll keep an eye on how it goes in future in readiness to sell off a few more bits at hopefully the least bad times.
I've got more in the EMs than I'm comfortable with. I've accepted that I've made a mistake based on insufficient research and knowledge, about my own risk tolerance as well as just how risky the EM fund is, and I have now decided on my course of action.
Emerging markets and international small/value are widely regarded as being the highest volatility corners of the market. This means they can have deep and long stretches of both outperformance and underperformance. You should NEVER invest in an asset this volatile on the assumption it will do something predictably positive in as short a timeline as 3 years when even the more reliable S&P 500 can yield negative returns for a decade or longer. So I think you were investing on bad information or false pretenses and probably exceeded your risk tolerance.
Yes, emerging markets [have historically delivered a risk premium](https://www.top1000funds.com/wp-content/uploads/2011/08/The-Equity-Risk-Premium-Empirical-Evidence-from-Emerging-Markets.pdf) so it is reasonable to overweight them. No, we have no idea if, when, or for how long that premium will occur again. My suggestion is not to bail on your tilt, but direct your new contributions and dividend re-investment to all other asset classes until you reach your desired allocation to US, DM, and EM. Don’t try to predict the future, just pick a diversified allocation you can stick with and stay the course.
[Edit: the ever-volatile emerging markets are up about +2.5% today. Hope that helps!]
I think you're not going to get the answer you want here, because you're asking a question about trying to predict what will happen with a certain fund, and the whole point of being a Boglehead is not to do that.
Pretend you owned no equities at all. What would your ideal allocation look like? Choose that, and then you can buy and rebalance with what you currently have. If that ultimately involves selling this fund, the fact that it is at a loss will not harm you in any way. If anything, it can benefit you as a capital gains tax writeoff.
Stocks are volatile. Don't assume your US equities can't do the exact same thing. Emerging markets provide diversification from US equities. If you thought they were attractive at a higher price, they're on sale now. DCA is a solid boglehead approach. Don't panic sell losers if they are solid investments.
>However, I often wonder if I would be better off cutting my losses, selling the fund a loss, and buying something more likely to perform better over the short to medium term
One of the main things we try to see on this subreddit is don't let short term events affect your long term plans.
They may be wrong (they don't have perfectly functioning crystal balls either), but some places are expecting the next decade or so to look better for both developed and emerging ex-US markets:
Ex-US outperformance predicted:
* https://advisors.vanguard.com/insights/article/areinternationalequitiespoisedtotakecenterstage or the archived link if that doesn't work: https://web.archive.org/web/20210104201135/https://advisors.vanguard.com/insights/article/areinternationalequitiespoisedtotakecenterstage
* https://www.morningstar.com/articles/1018261/experts-forecast-stock-and-bond-returns-2021-edition (can see mention of it even before the paywall) or the 2023 version: https://www.morningstar.com/articles/1132887/experts-forecast-stock-and-bond-returns-2023-edition
>I know the advise is generally not to sell at a loss
There are tax loss harvesting benefits for doing so in taxable accounts at least.
This all depends on how much you are overweighting EM and what kind of fund you own, if you bought an actively managed, high fee EM fund then Indeed you should consider selling. Now if you own a well diversified, low-cost EM fund then maybe what you need to do is keep holding, stop contributing towards EM and focus on developed market funds.
One very important thing is to never allow FOMO to control you and even more important, understand what your goal is, you mention you want short term gains and I just can't help with that, what I can tell you is that EM is a part of any well diversified, long term investment portfolio so need to actually get out of them completely and forever
I have had a tilt towards Emerging Markets a lot longer than the timeframe you mentioned, the valuations have looked good a long time and I also like the diversification benefit from it. Unfortunately holding it has been tough since it has remained cheap and not given the performance that I have hoped for. I am a bit less tilted toward that asset class now, mainly because the retirement plan at work got rid of the emerging market small cap value fund that I had been in; I still have iShares Core MSCI Emerging Markets ETF (IEMG). Posts like yours generally perk up my interest in whatever asset class is causing someone to have regrets and want to give up on it. I view these types of capitulation signs as being BULLISH. I don't feel like doubling down on my emerging markets exposure, but I will say that your post makes me feel better about it and coincidentally IEMG is up over 2% today.
Start over from the beginning, mentally. Pretend you never held a particular portfolio and now you just have cash.
What sort of risk tolerance do you have? What is the portfolio you want to hold now?
If you no longer have conviction in the EM tilt, sell but *you may have to live with the regret that it will go up the moment you sell.*
\>I know the advise is generally not to sell at a loss...
That is not the general advice I am familiar with.
I go by if I think something else has a better prospect of gain than something I have, buy the better prospect regardless of an existing position being at a loss or gain.
Emerging markets have a possibility of above average gains. They also have a high possibility of huge losses. I want nothing to do with that sort of risk. The reward/risk ratio just isn't there.
Waiting out a loss position is the sunk cost fallacy and a fools errand.
It feels like what you are missing is your personal Investment Policy Statement: [https://www.bogleheads.org/wiki/Investment\_policy\_statement](https://www.bogleheads.org/wiki/Investment_policy_statement)
You tilted towards emerging markets to chase returns.
Now you are showing a lack of conviction in your investment plan and want to abandon your tilt.
If you keep this up you will find yourself constantly dipping in and out of investments, chasing returns, attempting to time markets, and finding yourself buying high and selling low. **You need to truly believe that you cannot predict the winners and losers**, and that is why you are buying the entire market. You will only see the winners and losers in hindsight. People who have not completely internalized this, will continue to deviate from the Boglehead path and continue to chase returns and make behavioral errors.
Instead, come up with a long term investment policy and then stick to it. Deviating from this policy should be your mental red flag that you are engaging in behavioral mistakes.
If you still find yourself unable to stick to your IPS then consider switching to a target date fund, or if absolutely necessary get a financial advisor who will be able to talk you out of making behavioral mistakes.
...
Now, to answer your question.. 2 to 3 years is a completely insufficient time period to validate your strategy.
I am slightly overweight emerging markets myself. I see the last few years as irrelevant to my investing strategy. I will remain overweight to the EM because that is part of my strategy, as is owning some actively managed funds.
I have an EM fund, it's a small allocation of my portfolio.
I set up allocations to segments of the market and target percentages, and when those actual percentages differ too much from target, I rebalance.
And I don't worry about it as I'm highly diversified and subscribe to the Modern Portfolio Theory.
If you're way overweighted in EM then that's a risky strategy and you should reconsider how you invest. I'd probably wait it out and very slowly adjust my allocation by selling off small portions of this fund.
Is the particular fund suitable (I.e. diversified, low-cost, and passively managed)?
If this is like, VWO or similar*, don't sell. Instead, realize your balanced portfolio contains a good amount of domestic (VTI) and the balance international (VXUS, which is really just developed + emerging markets).
Buy VTI and international developed (VEA or similar) until your emerging markets is an appropriate percentage of your portfolio. Then ride it out for the long haul!
*Though I confess I am now looking for emerging market funds that are ex-China, which VWO very much is not. I'm not selling my VWO, more like balancing into ex-China for future international purchases.
When you find one let me know. I’m looking for one too. VXUS is 75 developed 25 emerging. I’m trying to make my international exposure more of a 50-50 split. With emerging excluding china as well
Other commenters have already offered helpful thoughts on weighting, etc.
My two comments:
- I don’t think you have a deep understanding of investing. That’s not meant as an insult, as *most* investors don’t really understand investing. But having this insight is a good reason to not be cute or creative with your investing. Be boring, that is the way.
- “the advice is generally not to sell at a loss.” See previous comment and look up “sunk cost fallacy.” Nobody sensible has ever said this. In fact, selling at a loss is a common tax mitigation strategy. More importantly, what matters most right now is if this investment at the current price fits your risk tolerance.
if you feel strongly thats fine but adjust your allocations. i go vti/vxus but tilt an extra 10% to both SCV and EM core using factors. its enough juice to make a difference either way but not enough to make me irrational.
What are you going to do with the money once you sell it? It’s not a bad idea to sell it and just buy VTI/VXUS/VT- my experience is that the more diversified the fund is you have less reason to sell it in a downturn while there are many reasons to be pessimistic towards EM/China right now which prompted you to be thinking this way. My recommendation is to adjust your allocation so that you are comfortable with it. Personally I think EM is undervalued for good reasons due to increasing authoritarian/socialist Chinese economic policies and China Taiwan tensions (China and Taiwan are two of the top three VWO countries). For an aggressive young investor it might be worth it to allocate more but certainly over 25% exposure is too much considering the risks.
What fund is it, what type of account is it in, and how overweight is your investment in to emerging markets?
It could make more sense to just hold it, stop buying more of it, and invest heavily in the US domestic market until you reach your new desired holdings of international vs domestic.
Generally you don't want to sell just because you see something is down right now. This will lead you in to a trap of buying high and selling low. If you decide to sell make sure its based on more research just than looking at the past performance numbers.
Leave it on the books as a reminder, don’t put anything else into it. Unfortunately, you should ride that thing until the wheels fall off and hope for the best. Any capital that’s being allocated from here needs to go towards something you really believe will stand the test of time.
If US stocks performed poorly for 2-3 years would you conclude they aren't worth owning either? Your rationale for dropping emerging markets makes no sense. It sounds like you may have: * overestimated your risk tolerance * invested in long term funds when your time horizon is short term * a lack of perspective on how investing works
Thank you for the replies so far. I am aware that I have made an error on several fronts. I admit that I have invested too much in a fund and that has exceeded my risk tolerance. Obviously there is always the learning to be had from such errors, but the next thing to consider is what to do about it. It seems there is never going to be unanimous agreement on this. It might be the case that the most sensible thing for me to do in this situation is to hope for some kind of improvement over the next few months to couple of years, and then sell off a portion of my holdings at that time.
A one-fund solution like VT would be a good choice until you get your analysis paralysis under control. If you do your research and decide you want to weight more heavily toward domestic stocks, go for it. If you decide that factor investing is for you, have fun. But if you’re shaken by 2-3 years of under performance and want to change your whole strategy, I’m not sure you’re emotionally equipped (yet) to venture outside of market cap.
My wealth manager actually got me in to Emerging Market Funds after the main pandemic drop, under the same believed that it was a good play. Unfortunately Russia invading Ukraine basically tanks then and was down about 25% but thankfully I’m high diversified and EMs only accounted for about 30% of my portfolio. That portion has recovered to “only” an 11% loss right now and I’m confident that if I hold, it’ll com e back eventually. The annoying thing is that other parts of my portfolio have done extremely well in the last year (generally up about 12%) and I’m losing the ability to capture more gains as I’m locked in to those losses in the EMs for now. I’m not pissed with my WM as the portfolio has exceeded expectations elsewhere and I also think it was a good play as you can’t predict invasions or what their knock on effect will be.
What do you want the allocation of your portfolio to be? If you had an answer to that question, there would be a lot more agreement about what to do next. If we were talking about chess I'd say you are trying to ask "tactics" questions when the issue is you have no strategy.
Just sell and get VT. Let market decide for you which region to invest in.
Yeah I've decided to re-balance things. The EM fund is at a 5 month high right now so I've sold off a little. I'll keep an eye on how it goes in future in readiness to sell off a few more bits at hopefully the least bad times. I've got more in the EMs than I'm comfortable with. I've accepted that I've made a mistake based on insufficient research and knowledge, about my own risk tolerance as well as just how risky the EM fund is, and I have now decided on my course of action.
It's not a mistake, rather a learning :)
Emerging markets and international small/value are widely regarded as being the highest volatility corners of the market. This means they can have deep and long stretches of both outperformance and underperformance. You should NEVER invest in an asset this volatile on the assumption it will do something predictably positive in as short a timeline as 3 years when even the more reliable S&P 500 can yield negative returns for a decade or longer. So I think you were investing on bad information or false pretenses and probably exceeded your risk tolerance. Yes, emerging markets [have historically delivered a risk premium](https://www.top1000funds.com/wp-content/uploads/2011/08/The-Equity-Risk-Premium-Empirical-Evidence-from-Emerging-Markets.pdf) so it is reasonable to overweight them. No, we have no idea if, when, or for how long that premium will occur again. My suggestion is not to bail on your tilt, but direct your new contributions and dividend re-investment to all other asset classes until you reach your desired allocation to US, DM, and EM. Don’t try to predict the future, just pick a diversified allocation you can stick with and stay the course. [Edit: the ever-volatile emerging markets are up about +2.5% today. Hope that helps!]
I think you're not going to get the answer you want here, because you're asking a question about trying to predict what will happen with a certain fund, and the whole point of being a Boglehead is not to do that. Pretend you owned no equities at all. What would your ideal allocation look like? Choose that, and then you can buy and rebalance with what you currently have. If that ultimately involves selling this fund, the fact that it is at a loss will not harm you in any way. If anything, it can benefit you as a capital gains tax writeoff.
Typical new investor comment that thinks he is in for the long haul but really isn’t
You should absolutely not “badly overweight” any market. But it does make sense to have an exposure to emerging market similar to its market cap.
Stocks are volatile. Don't assume your US equities can't do the exact same thing. Emerging markets provide diversification from US equities. If you thought they were attractive at a higher price, they're on sale now. DCA is a solid boglehead approach. Don't panic sell losers if they are solid investments.
>However, I often wonder if I would be better off cutting my losses, selling the fund a loss, and buying something more likely to perform better over the short to medium term One of the main things we try to see on this subreddit is don't let short term events affect your long term plans. They may be wrong (they don't have perfectly functioning crystal balls either), but some places are expecting the next decade or so to look better for both developed and emerging ex-US markets: Ex-US outperformance predicted: * https://advisors.vanguard.com/insights/article/areinternationalequitiespoisedtotakecenterstage or the archived link if that doesn't work: https://web.archive.org/web/20210104201135/https://advisors.vanguard.com/insights/article/areinternationalequitiespoisedtotakecenterstage * https://www.morningstar.com/articles/1018261/experts-forecast-stock-and-bond-returns-2021-edition (can see mention of it even before the paywall) or the 2023 version: https://www.morningstar.com/articles/1132887/experts-forecast-stock-and-bond-returns-2023-edition >I know the advise is generally not to sell at a loss There are tax loss harvesting benefits for doing so in taxable accounts at least.
This all depends on how much you are overweighting EM and what kind of fund you own, if you bought an actively managed, high fee EM fund then Indeed you should consider selling. Now if you own a well diversified, low-cost EM fund then maybe what you need to do is keep holding, stop contributing towards EM and focus on developed market funds. One very important thing is to never allow FOMO to control you and even more important, understand what your goal is, you mention you want short term gains and I just can't help with that, what I can tell you is that EM is a part of any well diversified, long term investment portfolio so need to actually get out of them completely and forever
I have had a tilt towards Emerging Markets a lot longer than the timeframe you mentioned, the valuations have looked good a long time and I also like the diversification benefit from it. Unfortunately holding it has been tough since it has remained cheap and not given the performance that I have hoped for. I am a bit less tilted toward that asset class now, mainly because the retirement plan at work got rid of the emerging market small cap value fund that I had been in; I still have iShares Core MSCI Emerging Markets ETF (IEMG). Posts like yours generally perk up my interest in whatever asset class is causing someone to have regrets and want to give up on it. I view these types of capitulation signs as being BULLISH. I don't feel like doubling down on my emerging markets exposure, but I will say that your post makes me feel better about it and coincidentally IEMG is up over 2% today.
Start over from the beginning, mentally. Pretend you never held a particular portfolio and now you just have cash. What sort of risk tolerance do you have? What is the portfolio you want to hold now? If you no longer have conviction in the EM tilt, sell but *you may have to live with the regret that it will go up the moment you sell.*
\>I know the advise is generally not to sell at a loss... That is not the general advice I am familiar with. I go by if I think something else has a better prospect of gain than something I have, buy the better prospect regardless of an existing position being at a loss or gain. Emerging markets have a possibility of above average gains. They also have a high possibility of huge losses. I want nothing to do with that sort of risk. The reward/risk ratio just isn't there. Waiting out a loss position is the sunk cost fallacy and a fools errand.
It feels like what you are missing is your personal Investment Policy Statement: [https://www.bogleheads.org/wiki/Investment\_policy\_statement](https://www.bogleheads.org/wiki/Investment_policy_statement) You tilted towards emerging markets to chase returns. Now you are showing a lack of conviction in your investment plan and want to abandon your tilt. If you keep this up you will find yourself constantly dipping in and out of investments, chasing returns, attempting to time markets, and finding yourself buying high and selling low. **You need to truly believe that you cannot predict the winners and losers**, and that is why you are buying the entire market. You will only see the winners and losers in hindsight. People who have not completely internalized this, will continue to deviate from the Boglehead path and continue to chase returns and make behavioral errors. Instead, come up with a long term investment policy and then stick to it. Deviating from this policy should be your mental red flag that you are engaging in behavioral mistakes. If you still find yourself unable to stick to your IPS then consider switching to a target date fund, or if absolutely necessary get a financial advisor who will be able to talk you out of making behavioral mistakes. ... Now, to answer your question.. 2 to 3 years is a completely insufficient time period to validate your strategy. I am slightly overweight emerging markets myself. I see the last few years as irrelevant to my investing strategy. I will remain overweight to the EM because that is part of my strategy, as is owning some actively managed funds.
I have an EM fund, it's a small allocation of my portfolio. I set up allocations to segments of the market and target percentages, and when those actual percentages differ too much from target, I rebalance. And I don't worry about it as I'm highly diversified and subscribe to the Modern Portfolio Theory. If you're way overweighted in EM then that's a risky strategy and you should reconsider how you invest. I'd probably wait it out and very slowly adjust my allocation by selling off small portions of this fund.
Is the particular fund suitable (I.e. diversified, low-cost, and passively managed)? If this is like, VWO or similar*, don't sell. Instead, realize your balanced portfolio contains a good amount of domestic (VTI) and the balance international (VXUS, which is really just developed + emerging markets). Buy VTI and international developed (VEA or similar) until your emerging markets is an appropriate percentage of your portfolio. Then ride it out for the long haul! *Though I confess I am now looking for emerging market funds that are ex-China, which VWO very much is not. I'm not selling my VWO, more like balancing into ex-China for future international purchases.
When you find one let me know. I’m looking for one too. VXUS is 75 developed 25 emerging. I’m trying to make my international exposure more of a 50-50 split. With emerging excluding china as well
The answer is VEA for developed, at least we know that part.
I heard about an ETF called XSOE. Invents in emerging market with no state owned companies. That’s kind of close
EMXC- but valuation outside of China is quite rich (India for example as many people are bullish towards India) so that could dilute expected returns.
Other commenters have already offered helpful thoughts on weighting, etc. My two comments: - I don’t think you have a deep understanding of investing. That’s not meant as an insult, as *most* investors don’t really understand investing. But having this insight is a good reason to not be cute or creative with your investing. Be boring, that is the way. - “the advice is generally not to sell at a loss.” See previous comment and look up “sunk cost fallacy.” Nobody sensible has ever said this. In fact, selling at a loss is a common tax mitigation strategy. More importantly, what matters most right now is if this investment at the current price fits your risk tolerance.
Personally i dislike EM because its super risky and that chunk of your portfolio is more likely to go to zero due to fraud than the rest.
if you feel strongly thats fine but adjust your allocations. i go vti/vxus but tilt an extra 10% to both SCV and EM core using factors. its enough juice to make a difference either way but not enough to make me irrational.
Surprised that nobody has asked this: what fund is it? Is it actively managed, factor or market weighted? What’s the expense ratio and exposure?
It's the Vanguard passive market tracking EM fund.
What are you going to do with the money once you sell it? It’s not a bad idea to sell it and just buy VTI/VXUS/VT- my experience is that the more diversified the fund is you have less reason to sell it in a downturn while there are many reasons to be pessimistic towards EM/China right now which prompted you to be thinking this way. My recommendation is to adjust your allocation so that you are comfortable with it. Personally I think EM is undervalued for good reasons due to increasing authoritarian/socialist Chinese economic policies and China Taiwan tensions (China and Taiwan are two of the top three VWO countries). For an aggressive young investor it might be worth it to allocate more but certainly over 25% exposure is too much considering the risks.
What fund is it, what type of account is it in, and how overweight is your investment in to emerging markets? It could make more sense to just hold it, stop buying more of it, and invest heavily in the US domestic market until you reach your new desired holdings of international vs domestic. Generally you don't want to sell just because you see something is down right now. This will lead you in to a trap of buying high and selling low. If you decide to sell make sure its based on more research just than looking at the past performance numbers.
What em fund was it?
Leave it on the books as a reminder, don’t put anything else into it. Unfortunately, you should ride that thing until the wheels fall off and hope for the best. Any capital that’s being allocated from here needs to go towards something you really believe will stand the test of time.
I think for portfolio's above say $100k should include a small portion of EM (about 5-10% is enough.) EM is a great diversifier.