How I did it: 35% One-Year Return
So first things first:
#1 – It was a little more than a 35% return. It was 37.66% to be exact (at least that’s what my holdings in my taxable account shows, so I’ll have to assume a similar situation in my tax-sheltered accounts since I regularly invest across all accounts) in approximately a year and 4 month time period, so I rounded down on both.
#2 – I did not get a 35% return on my entire portfolio. That would’ve been awesome; but alas, it was only in a segment of my portfolio. In my emerging market allocation, which equates to roughly $200K of my portfolio. So it’s still a pretty hefty chunk of cash. That said, I’ve averaged 15%+ annually (for my entire portfolio) for the past 10 years, (special thanks goes to: the second longest bull market run in US history).
#3 – So which fund was it? Ok ok, I’ll share the love: the bulk of my direct emerging market allocation is in my taxable account. And it’s in the following ETF’s, ticker symbols: VWO and SCHE. The reason why I have them in two different ETF’s that are similar is because I like doing TLH (tax loss harvesting) when the opportunity arises so these two are TLH partners. I’ll do a future post on tax loss harvesting if anyone’s curious about what it is; but to be honest, most people will probably not find it very useful because it’s only relevant for people who have taxable accounts. And I don’t recommend anyone contribute towards a taxable account before maxing out all of their tax sheltered options first.
So why did I do this?
#1 – We tilt heavy towards international and emerging markets because it’s relatively cheap. As I’ve mentioned above, my heavy tilt towards emerging markets translates to roughly $200K across all of our tax sheltered and taxable accounts. Maybe I’m being greedy, but I like to think that I made a calculated risk, and it paid off!
#2 – I keep track of the PE10 (Shiller/Cape Ratio) of different countries and market segments. Emerging markets as a whole has been the underdog for a long time (completely trounced by domestic – which is the US in my situation for I believe over a decade the last time I checked). Now they’re finally roaring back. Fortunately, I started putting a lot of our NEW contributions (401K, IRA, and taxable account) towards emerging markets starting in late 2015 when the US market started becoming more and more expensive from a valuation standpoint along with some re-balancing in our tax sheltered accounts. I was heavily tilted towards the US.
So what now?
#1 – Emerging market is still attractive from a strict valuation standpoint. Compared to global developed markets, from a valuation standpoint, emerging markets is still at about a 40% discount. Yes it’s rallied a ton this year and most of last year, but strictly from a valuation standpoint, emerging markets look fairly cheap to me. So a healthy amount of any of my new contributions will be in emerging markets still. Wouldn’t you buy what you would buy anyway, at a 40% discount? If it were clothes or electronics, or even houses, most people think this way; but for some reason people don’t think this way when it comes to assets like stocks.
#2 – Europe is attractive as well. Or so says Robert Shiller (Yale professor and Noble Laureate). And I agree with him. Now that Macron won the election in France, the political environment and the future of the EU is looking more stable. Because of this, I think Europe is pretty attractive. I started tilting towards Europe as well, earlier this year, pre-Brexit. I believe there’s more gains to be had, especially over the long-term, and especially compared from a risk parity standpoint.
#3 – I will continue to invest in all markets. I have no idea where we’ll go from here. I think long-term, markets tend to revert to the mean. But it can take years. We’re pretty overvalued here in the US, but markets tend to stay extreme for long periods. Both on the upside and the downside. So I am not a big believer in totally exiting one segment of the global market just because it’s looking “relatively” frothy. By exiting, you could potentially lose years and years of gains. I remember even back in 2011 people were saying how bubbly the market looked, but look how far we’ve come since 2011!
#4 – I might start cherry-picking country-specific ETF’s. If emerging markets, as a whole, continue to do well, I might start looking at putting only our new contributions into country-specific ETF’s. Like Russia (RSX) and Brazil (EWZ). Again, I’m not looking to rebalance into country-specific ETF’s. That would be too risky, even for my tastes. I’m strictly talking about new contributions, into our taxable accounts only, going forward.
#5 – A word of caution for you, the reader! All of this does not mean I’m recommending you jump on the emerging market train because everyone’s financial situation is so unique. I know this sounds cliche, but here’s why I say this. My wife and I are able to take huge risks because we’re really early in our career still, we make a healthy income, and our expenses are fairly low relative to our income because we’re conservative with our consumption habits relative to the average American. Your situation is most likely not like our situation. We also have pretty big safety measures (i.e. savings and taxable accounts) like having large portions of our money in Roth accounts which allow us to take the principal out without being hit with penalty fees, if we had an emergency situation. So again, all of this allows us to take huge risks with the equity side of our portfolios (we have almost zero bonds). It wouldn’t surprise me if we had multiple 50%+ corrections, similar to 2008-2009, somewhere down the line, in my investing time horizon. Lastly, emerging markets as a whole has done tremendously well over the past year and a half. Doesn’t necessarily mean the fun will end here, but usually people start piling on too late (once the returns have already been milked).
Related: The Money Snowball Effect