I was just wondering which of the big investment managers you prefer and why?
Seems that they are all very similar (Vanguard, Fidelity, State Street...) as they offer very similar ETFs and all have low fees.
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Vanguard usually has the lowest fees so I strictly invest with them. 60% VOO/VTI, 20% VIOO, 10% VTV, 10% VGT. This is the way.
Do you see yourself investing in fixed income, dividend or RE ETFs?
Given that investing styles depend on your own goals, there is no one size fits all approach. However, assuming you are a long-term investor looking to maximize wealth without taking any speculative gambles, holding 90-100% equities is by far the most suitable strategy.
Pioneering Portfolio Management is definitely the best book to learn about asset allocation in general. In this book, it is revealed that fixed income’s real inflation-adjusted returns are very unattractive as a long-term investment vehicle. I would only allocate to fixed income if you need to preserve your short term wealth for some reason later in life / closer to retirement.
As for real estate, the risk/return profile for REITs are essentially a hybrid between equities and fixed income. However, REITs are fairly correlated with equity markets but they offer less upside potential for capital appreciation on average. REITs do have tax advantages and high dividend yields but they still underperform the upside of equities long-term. Therefore, just like fixed income, I would resort to REITs more to preserve capital than to maximize wealth.
If you invest in VOO, you get excellent dividend exposure from the largest 500 publicly traded companies (these firms tend to be relatively mature and boast higher dividend yields). You also get dividend exposure with VTV (value-focused). I would make sure you have your dividends reinvested automatically (DRIP) so your money is constantly working for you.
Despite who you ask, the grand truth is that there is no crystal ball into which equity allocation makes the most sense. However, based on the academic and empirical literature across the last 6 decades, small cap and value stocks tend to outperform the S&P 500 over the long-term. Albeit they have higher risk profiles, it would be beneficial to increase exposure to small caps + value stocks to improve your upside potential. If you are bullish on technology long-term, it also wouldn’t hurt to allocate a sliver into VGT. Technology companies traditionally offer higher profit margins than any other industry due to the ability to scale their products (software) at a (relativity) cheap cost. No question it is the most innovative sector and most of the successful venture-back firms are in tech. Unless you see this industry maturing or plateauing, I would be overweight.
Etrade has a nice automated etf portfolio
I also would only add exposure to international stocks to hedge risk - you should not expect to capture outperformance relative to the US markets.
The empirical evidence shows that international stocks have overwhelmingly underperformed the S&P essentially as long as data has been available. There are ambivalent views as to whether internationals offer uncorrelated returns to US equities. In theory, this should be true but most times US recessions severely impact the global economy and international stocks will suffer because of it. Perhaps, the uncorrelated price movements are more so from internationals counties experiencing their own recessions when the US is in a bull market, rather than the US contracting when internationals are expanding.
In my opinion, wealth managers have promoted international exposure to their clients merely for the perception that they are adding more “sophistication and value” than merely buying VOO and calling it a day. After all, why would you pay 1% of your assets for your advisor to tell you “just buy S&P and chill”?
Financial advisors have now been heavily selling “international stocks” as a key to “complete diversification”. However, studies show there really is no marginal diversification benefit to holding 300 equities versus 3000 equities). If you don’t believe me, look at virtually any European or emerging markets fund and compare their performance to the US.
The bottom line is that international stocks pose way larger political risk than domestic stocks. Emerging markets follow extremely different legislation and many businesses are restrained and manipulated by their governments (especially the communist ones). Not to mention, receiving dividends also becomes a more complicated issue when governments withhold pay to foreign investors.
Higher risk is usually associated with higher returns but so far this higher political risk has been unrewarding so far for international investments. Consider to yourself if you think Chinese or Russian politics will truly be different in the next 40-50 years overseas than they have been recently. Proceed internationals with caution and expect it to be more of a hedge to your overall portfolio than means to capture greater upside potential in environments with more price inefficiencies (if an inefficient market never eventually becomes efficient, how are you supposed to make money from it?)
Wouldn't the EMH say that, while international indices have underperformed the S and P 500 for decades, the likelihood that this will continue is 50/50?
Genuinely curious - I know very little about this, and I read an economist suggest that that was the case.
EMH believes in modern portfolio theory: there is no use in trying to find undervalued securities since everything is accurately priced; instead, it’s all about risk/return statistics.
In modern portfolio theory, the greater the return, the higher the implied risk of the investment. It would be impossible in their opinion to find investments that consistently yield sharpe ratios greater than 1.00 (outside of diversification on the efficient frontier). Everything is assessed by beta.
When it comes to equities, EMH believers might say that all equities in general possess a similar risk/return profile — with large cap / growth stocks having lower expected returns and less risk and small cap / value stocks having greater expected returns with more risk.
All this said, international equities include all forms of stock types: small, large, value, growth. Within these categories, each SHOULD perform similarly to the U.S. counterparts (e.g. European small caps = US small caps). Obviously, this hasn’t been the case ever in history, as US has dominated in every single category. As a result, collectively speaking, internationals have failed to offer the same equity risk/return profile than the U.S. Most agree this underperformance is due to the different political environment.
Some have tried to quantify the political risk into the equity risk premium (e.g. Damodaran ERP). This is the best way to do it in my opinion but it still results in the same problem: higher political risk = higher ERP = higher discount rate = lower NPV.
Considering all evidence and valuations, internationals stocks should outperform U.S. stocks. They are riskier because the countries they operate in are less friendly to capitalistic environments. Technically speaking, EMH believers would say that international equities should outperform in the future given their risk profile. But they can’t prove it like they can explain why value and small cap have outperformed. If they could, the Fama and French model would include political environment. The reason is: there’s no fucking way to accurately quantify the unquantifiable political risk. For instance, how can you price-in Russia’s invasion on Ukraine?
At some point, you’d think 50 years of data would prove risk adjusted outperformance. It did for small caps and value stocks. EMH are too invested in their ideals to realize internationals break their theories. EMH preaches international exposure for the sake of diversification in the hopes that one day they can say “we told you so”.
In the end, the political risk technically would be worth it if suddenly each international country restructured its government to be capitalist-friendly. Then, companies would be more profitable and be able to more effectively return capital to shareholders.
Who needs a financial advisor when you got "Associate 1 in ER". Jokes aside, thanks for your comment.
I'm no one to give advice on this, but as you have said I have seen big names advising on not to solely focus on the US, although they recommend allocating something like 80% of your equity exposure to the US.
However, I like the international exposure. I follow some European names that have given me good returns since the pandemic until the Russia situation. I am now going to solely focus on ETFs and I think of investing about 80% in the US (20% VOO, 15% VTI, 15% VGT, 15% VIOO, 15% VTV) and the rest in international ETFs (either 20% VXUS or 10% VWO, 10% VEA).
Yes, if it helps you sleep at night. Internationals deserve a place in your portfolio. Essentially you’re making the bet that one day their governments will be more capital-friendly, or the next Facebook could be originated overseas.
I should also caveat my points above to say that international itself is a broad category. Clearly, there’s a difference between British equities and Chinese equities. Typically, first world developed European “international” companies have a more favorable risk/return profile today than third-world emerging market stocks or communist markets.
I reccomend Fidelity Zero (mutual funds), as they have 0% MER. They actually almost always outperform their respective index due to lending out shares.
^^^^^^
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