Author Archive: indexfundfan

Are you overinvested in emerging markets?

Emerging markets retreated with a vengence in recent weeks, much to the dismay of many new emerging market investors:

NEW YORK, May 22 (Reuters) – Major Latin American stock, bond and currencies plummeted on Monday, and stocks were on their way to post their biggest one-day drops in two years, as investors stampeded out of emerging markets worldwide fearing higher interest rates and slumping commodity prices.

The decline followed earlier slumps in Europe and Asia. Turkey’s stock market fell 7 percent, and the Indian bourse fell 10 percent, prompting a one-hour suspension tradimg suspension.

The Indian bourse closed nearly 4 percent down, at a 10-week low. Hong Kong stocks closed off about 3 percent showing their biggest fall in two years.

In Moscow, Russian shares crashed Monday in their biggest one-day percentage slide since 2003, forcing the MICEX exchange to suspend trading after its main index fell by 11 percent. That accelerated a nine-day selloff which has sliced over a quarter off the value of Russian stocks.

The sad part is that many of these investors only recently decided “to diversify into emerging markets”, having been enticed by the many emerging market funds’ recent performance numbers.

The ones that really believe that emerging market equties would add to their portfolio diversification would stay the course and continue to DCA according to their asset allocation plan. However, I believe we will see a fair number of them running for the exits very soon.

Prepay mortgage or invest the money

Many investors juggle with mortgage payments as well as making regular contributions to their investment accounts. The question that sometimes come up is whether does it makes sense to prepay (i.e. make additional payments) the mortgage or invest the money.

Larry posted (49553) a paper that discusses the advantages and disadvantages of prepaying mortgage payments versus investing the money in tax-deferred accounts. Here’s the abstract:

We show that a significant number of households can perform a tax arbitrage by cutting back on their additional mortgage payments and increasing their contributions to tax-deferred accounts (TDA). Using data from the three latest Surveys of Consumer Finances, we show that more than 45% of U.S. households that are accelerating their mortgage payments instead of saving in tax-deferred accounts are making the wrong choice. For these households, reallocating their savings can yield a mean tax benefit of 11 to 17 cents per dollar, depending on the choice of investment assets in the TDA. In the aggregate, these mis-allocated savings are costing U.S. households as much as 1.7 billion dollars per year. Finally, we show empirically that this inefficient behavior is unlikely to be driven by liquidity or other constraints, and that self-reported debt aversion and risk aversion variables explain to some extent the household preference for paying off their debt obligations early and hence their propensity to forgo our proposed tax arbitrage.

Jack Bogle’s portfolio

Sue Stevens talks to John (Jack) Bogle about his portfolio in a recent article on Morningstar.

Jack’s portfolio is approximately 60% fixed income, 40% equity. The funds are

VG Total stock market index
VG 500 index
VG Extended market index
VG Explorer
VG Windsor

Fixed income
VG Intermediate bond index
VG Inflation-protected securities
VG Limited-term tax-exempt

Balanced fund (legacy)
VG Wellington
VG Wellesley

A few final words from Jack: “In all, my portfolio could have well been designed by any serious Boglehead. Sure, I may be too conservative, but that’s who I am and always have been. But I know–I know!–that whatever returns the stock and bond markets are kind enough to deliver in the uncertain, risk-laden era ahead, I’ll earn my fair share. That’s good enough for me. So I shall ‘press on, regardless,’ and “stay the course!’. No surprises there.”