Though apt to lurch violently from boom to bust, emerging markets stocks do produce higher returns over time — but are they worth all the portfolio whiplash your clients must endure?
Actually, yes — if the advisor orchestrates the client’s portfolio intelligently — according to Servo Wealth Management’s Eric Nelson most recent blog post.
On the face of it, whether emerging market stocks enhance an investor’s portfolio is a legitimate question.
That is because their volatility is of such a higher magnitude that one might think to enhance portfolio returns without nearly as much added risk.
Specifically, Nelson cites the Dimensional Fund Advisors emerging markets value fund’s standard deviation of 27 over the past 16 years; that is close to twice the volatility of DFA’s U.S. large growth portfolio (based on the S&P 500) whose standard deviation was just 15.8 over the same period.
An advisor might rationally seek to improve portfolio return by adding large value stocks, small value stocks, international large value or international small value stocks. All of these had higher returns and higher risk than the S&P 500, but their standard deviations were 19, 21.5, 19.7 and 18.5, respectively.
The riskiest of that bunch, U.S. small value, was around halfway between the S&P 500 and an emerging markets value fund in terms of standard deviation. So one might think twice about staking a position.
Put differently, should a portfolio include emerging-markets value stocks — whose average annual return over the past 16 years was a whopping 12.4% — when adding international small value, which returned 10.8% over the same period, nearly matches the return advantage with so much less risk (18.5 vs. EM’s standard deviation of 27)?
The surprising answer is yes, and the reason Nelson gives is that “investors don’t buy positions, they own portfolios.”
The Oklahoma City-based fee-only advisor demonstrates the magic of diversification by comparing an all-stock developed markets portfolio (70% U.S., 30% international) returned, over the past 16 years, 8.6% annually with a standard deviation of 17.8.
Yet a similar 70-30 mix, this time including emerging markets (in addition to international large value and international small value), returned 9.2% with a standard deviation of 18.3.
Writes Nelson:
“The return increased by 0.6% per year, while the standard deviation (risk) of the portfolio only increased by 0.5%. Over a period of more than 15 years, a 0.6% per year higher return would lead to $0.38 more wealth for every $1 initially invested, while a half-percent increase in volatility is almost unnoticeable.”
Practically a free ride.
And Nelson finds another implication for safety-seeking investors. By rearranging the portfolio to include a 15% allocation to high-quality short-term bonds but by including just an 8.5% stake in emerging markets (within the 85% stock portion of the portfolio), an investor would earn the same 8.6% return as the developed-market-stocks-only portfolio, but with a standard deviation of just 15.5 rather than 17.8.
Whether maximizing returns or limiting volatility is the goal, emerging markets stocks seem poised to help long-term investors, Nelson concludes.
But beyond the principled basis for their inclusion, ThinkAdvisor asked if their poor recent performance further strengthens the case for emerging market stocks.
“You don’t have to be a market timer to realize that emerging market returns have been negative or in the low single digits for the last several years, so they’re cheaper on a relative basis,” Nelson says.
“I wouldn’t be surprised if over the next 3 to 5 years, emerging markets stocks do several percentage points better than U.S. stocks because that’s how things work,” he adds in a nod to the mean reversion investing principle.
“So the long-term case for including them in a portfolio is there," he says. "And as to the short-term basis, there’s almost no case I can think of for excluding them right now. So you have all your bases covered.”
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Frederic J. Brown, AFP/Getty Images WASHINGTON -- A gauge of U.S. consumer spending rose more than expected in December, suggesting the economy gathered steam at the end of last year and was poised for stronger growth in 2014. The Commerce Department said Tuesday retail sales excluding automobiles, gasoline, building materials and food services, increased 0.7 percent last month after a 0.2 percent rise in November. The so-called core sales correspond most closely with the consumer spending component of gross domestic product. Economists polled by Reuters had expected core retail sales to rise 0.3 percent in December. The increase suggested consumer spending accelerated in the fourth quarter from the third quarter's 2 percent annual pace. It was also the latest indication of strong momentum in the economy at the end of 2013. Though job growth stumbled in December, that was largely seen as temporary given the cold weather that gripped parts of the country during the month. "Weather aside, if we're right in thinking that the underlying trend in jobs growth is still improving, households will continue to spend more freely in 2014," said Paul Dales, senior U.S. economist at Capital Economics in London. "Overall, this report supports our view that a 4 percent annualized rise in real consumption will help to generate a decent 3 percent gain in overall GDP in the fourth quarter of last year," he added. U.S. stock index futures extended gains on the report, while prices for U.S. Treasury debt were little changed. A stock market rally last year and rising home values have boosted household wealth, encouraging Americans to open their wallets a little bit more. Core sales last month were lifted by a 1.8 percent rise in receipts at clothing stores. Sales at food and beverage stores recorded their largest increase in seven years. There were also increases in online store sales. A cold snap during the month likely contributed to holding down sales of automobiles. Receipts at auto dealers fell 1.8 percent, the largest decline since October 2012. Auto sales had risen 1.9 percent in November. That limited overall retail sales to a 0.2 percent gain in December. Retail sales increased 0.4 percent in November. Economists had expected retail sales to edge up 0.1 percent last month. For all of 2013, retail sales rose 4.2 percent. Retail sales excluding automobiles rose 0.7 percent. Sales of furniture, sporting goods, building materials and garden equipment and electronic appliances fell. A separate report from the Labor Department showed import prices were unexpectedly flat in December, showing no signs of imported inflation. Domestic inflation continues to trend lower and the lack of price pressures mean the Federal Reserve will likely keep interest rates near zero for a while even as it scales back its monthly bond purchases.
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Getty Images What do you want to do when you retire? I'm guessing paying down debt isn't on your short list. Unfortunately, for many Americans it is. Mortgages, credit card debt, student loans and supporting elderly parents are affecting the retirement plans of many baby boomers. The financial crisis devastated home values and retirement accounts, and a general lack of planning left little time for boomers to recover the losses. A Fidelity Investments survey showed that almost half of all baby boomers who have pensions expect to retire with debt, with one if five of them saying they did no planning before retirement. Also, a 2012 Demos study found that people 65 and older have more credit card debt than any other age group -- $9,300 on average. Demos suggested that the recession reduced savings and forced those in or near retirement to cut back. "I don't think people are making a conscious decision to carry debt," Lori Trawinski, senior strategic policy adviser at AARP Public Policy Institute, told Kiplinger. "People have no choice, because they have other obligations they need to take care of." If you are nearing retirement or already retired, how do you pay down debt? Here are eight ways to get some relief. How to Pay Down Debt in Retirement 1. Consult a professional. A certified financial planner can help you build a retirement plan, including specific benchmarks so you can dig out of debt and build savings. A CFP can also help you build an overall retirement spending plan that includes debt payments, fixed expenses and anticipated sources of retirement income. 2. Know your benefits. The National Council on Aging, a nonprofit service and advocacy organization that improves the lives of older adults, runs a website called BenefitsCheckup.org. The site has a tool to help you make sure you are receiving all the benefits you are entitled to. These benefits can help you pay for medications, health care, food, utilities and more. 3. Downsize. This is a very emotional decision but selling your house and moving into something much smaller and more affordable will free up cash for living expenses. Ditching your high-maintenance house means you will be free of high mortgage payments and expensive maintenance, insurance and tax bills. 4. Accelerate your mortgage payments. This is only a good option if you have mortgage debt and cash in the bank; this route is not for retirees with other kinds of high-interest debts or low cash reserves. If you compare the interest rate on your mortgage with the current rates on savings accounts and CDs, you might save more money paying down the mortgage instead of keeping the money in the bank. Just don't withdraw from your retirement accounts to pay off the house -- the tax owed on the distributions will cancel out the mortgage savings. 5. Refinance your mortgage. Some retirees have enough equity to refinance their homes, pull out cash, invest the money and try to live off the investments. Retirees might want to avoid using mortgage relief firms, as some debt settlement programs can leave you paying more than the original debt owed. If you do use a mortgage settlement firm, know that the FTC bans these firms from charging upfront fees. Also, be wary of short-term interest rate deals -- those rates can spike later. 6. Get a reverse mortgage. There are risks associated with reverse mortgages: They generally have high fees and interest rates. Also, the loan must be repaid with accumulated interest when the owner passes away, sells the home or no longer uses it as his primary residence. Reverse mortgages are one of the biggest scams targeted at the elderly. Still, they are an attractive option because retirees do not have to make monthly principle or interest payments while living in the home, although they must stay current on tax and insurance premiums. Retirees considering a reverse mortgage should consult a government-approved housing counselor for help. 7. Postpone retirement. Postponing retirement gives you more time to bring in income and pay down debts. Working later means you can also delay claiming Social Security benefits or other sources of retirement income, which gives your savings extra time to compound. This might be a tough pill to swallow if you've had your eye on retiring sooner rather than later, but just a few extra working years might be all you need to eliminate your debts. 8. File bankruptcy. Senior citizens are the fastest growing number of bankruptcy filers. It's an attractive option to retirees, because chapter 7 bankruptcy liquidation does not affect 401(k) accounts, social security benefits or home equity. IRAs are also protected up to more than $1 million. Eliminating debts through bankruptcy makes sense for some boomers, who don't have a chance to increase their income so late in life. There are some exemptions to which accounts are or are not affected, which vary by state. It's best to consult a bankruptcy attorney to understand all the implications. 9. Ask for help. There are several nonprofit counseling agencies that help people establish a manageable schedule for repaying debts. Just avoid debt negotiation firms that charge high fees or are scams. Some trusted sources include the Association of Independent Consumer Credit Counseling Agencies and the National Foundation for Credit Counseling. Debt counselors can review your budget and spending and come up with an action plan; some can even offer a reduction or waiver of interest charges and penalties. "No one should be worried about making a credit card payment versus paying for medicine," Leslie Linfield, executive director at the Institute for Financial Literacy, told Kiplinger. "You've contributed to the system your whole life. It's okay to ask for assistance."
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GM lawyers warned that the automaker risked being hit with severe and costly legal penalties for the way it handled the flawed ignition switch. NEW YORK (CNNMoney) General Motors was warned by its own lawyers at least four times that it risked being hit with severe and costly legal penalties for the way it handled the flawed ignition switch tied to at least 13 deaths, according to a Senate hearing Thursday. 
Nick Ut/APHillary Rodham Clinton has signed copies of her book for Barnes & Noble. There were plenty of winners and losers this week, with the last major bookstore chain landing some star power to make its holiday sales ring up and a renter of movies and games on discs playing Grinch with a seasonally silly price hike. Here's a rundown of the week's smartest moves and biggest blunders. Twitter (TWTR) -- Loser It seems that a week doesn't go by without a company making a social media mistake, usually in the form of posting a controversial or insensitive tweet. This week it was Twitter itself that blew it. Twitter CFO Anthony Noto posted a public tweet on Monday that apparently was intended as a private direct message to somebody. "We should buy them," he writes, likely discussing an unnamed acquisition target, and pointing to a mid-December meeting. "We will need to sell him," he concludes. "I have a plan." It's good to know that even Twitter is human. Apple (AAPL) -- Winner It's a safe bet that Apple's going to be selling plenty of iPads, Macs, and iPhones this holiday shopping weekend, and at least one analyst wants to get in ahead of the customers. Susquehanna's Chris Caso is raising his price target on Apple from $120 to $135, encouraged by the improving production and sales trends of the pricier iPhone 6 Plus. The larger smartphone sells for $100 more than the comparable iPhone 6, but it doesn't cost that much more to make. In other words, Apple scores a larger profit from the iPhone 6 Plus than the iPhone 6. Redbox -- Loser It's going to cost a little more to check out a DVD, Blu-ray, or video game from a Redbox machine. Parent company Outerwall (OUTR) announced this week that it's raising its rates. The daily-rental rates will go from $1.20 to $1.50 for DVDs, from $1.50 to $2 for Blu-ray discs, and from $2 to $3 for video games. The market applauded the move by sending the stock higher on the announcement, but are we forgetting that Redbox was having a hard time growing its rental business at the old rate? Outerwall's latest quarter found Redbox rentals declining 13.7 percent over the prior year's period. Making rentals even more expensive is only going to drive more video buffs to digital and on-demand rentals. Barnes & Noble (BKS) -- Winner Leave it to the last remaining major book superstore chain to come up with a novel way to drum up traffic. Barnes & Noble is making Black Friday interesting by offering 500,000 signed editions of more than 100 books available exclusively at its stores. We're talking about famous authors including Dan Brown and Anne Rice, but also celebrity writers including Amy Poehler, George W. Bush, Hillary Rodham Clinton, and Joel Osteen. This should bring some serious buzz back to the booksellers that normally sit out the early days of the holiday shopping season. Barbie -- Loser Barbie's reign atop the National Retail Federation's annual survey of most coveted toys has come to an end. Mattel's (MAT) Barbie has topped the list since it began tracking parent holiday purchasing intentions 11 years ago, but this time the pole position belongs to Disney's (DIS) "Frozen" franchise. One in five parents plan to buy "Frozen" items for their daughters, beating out Barbie, which will be on the shopping list of 17 percent of parents. Let's just hope that we never have to buy a Malibu Anna or an Elsa Beach House. More from Rick Aristotle Munarriz
cspc.gov Nearly 5 million Graco strollers are being recalled in North America after at least a half-dozen reports of children's fingers getting cut off in the hinges, the U.S. Consumer Product Safety Commission said on Thursday. At least 11 incidents have been reported involving finger injuries in the popular strollers including the six fingertip amputations and four partial amputations. A nearly identical recall was conducted by Graco in 2010, which followed a similar recall a few months earlier by competitor Maclaren. The number of strollers involved in this recall, however, is far larger. This recall, which involves 4.7 million strollers in the U.S. and 202,000 in Canada, includes 11 models of Graco stroller: Aspen, Breeze, Capri, Cirrus, Glider, Kite, LiteRider, Sierra, Solara, Sterling, and TravelMate Model Strollers and Travel Systems. The China-made strollers were sold at major retailers including Target (TGT), Toys R Us, Walmart (WMT) and Amazon.com (AMZN), from August 2000 utnil this month for about $40 to $70 for the stroller and $140 to $170 for the travel system. A full list of models is available here. If you have one of the strollers you should contact Graco to receive a free repair kit, which includes hinge covers. The kit will be available starting next month. In the interim,"caregivers should exercise extreme care when unfolding the stroller to be certain that the hinges are firmly locked before placing a child in the stroller," the CPSC said. "Caregivers are advised to immediately remove the child from a stroller that begins to fold to keep their fingers from the side hinge area." You can contact Graco Children's Products at 800-345-4109 weekdays from 8 a.m. to 5 p.m. Eastern time, or visit the company's recall site. The Apple Watch doesn't come out until 2015, and it's going to cost you at least $350. The VTech Kidizoom Smartwatch is out now and only costs $60. It's clear which smartwatch is going to wind up dominating the market.
skynesher More than two out of three college graduates now leave school with student loan debt. And the debt they carry out of school these days -- a median of nearly $27,000 as of 2011 -- is "more than twice that of college graduates 20 years ago." These are two conclusions cited in a recent Pew Research Center analysis of government data on student loan debt. But they're not the most startling conclusions. According to Pew, the biggest increase in student borrowing over the last 20 years has been among the wealthy. Pity the Poor Kids As you'd expect, Pew data shows that student loan debt in America is most often concentrated among students of limited financial means. According to Pew, the majority -- 56 percent -- of student loan debt today is borne by students from the lower and lower-middle income classes. Indeed, 77 percent of low-income students, hailing from families making less than $44,432 per year, now leave college with at least some student loan debt. Seventy percent of lower-middle-class students (from families earning $44,432 to $83,406) are in similar straits. And even among upper-middle-class students (from families earning $83,407 to $125,772), 62 percent come out of college burdened by debt. Pity the Rich Kids, Too As for students from what Pew terms the high-income stratum -- families earning $125,773 and up -- 50 percent of such "rich kids" now carry student loan debt into their post-baccalaureate lives. That's a much smaller proportion of kids carrying debt than is found among students less-well-off. But it's still twice the percentage of such kids carrying student loans as we saw back in 1992. That's the biggest jump in the proportion of students carrying loan debt found among any of the four income strata surveyed by Pew. Indeed, the prevalence of student loan debt among high-income students has grown more than twice as fast as such loans have grown among low-income students. And student loan debt among upper-middle-class students is growing nearly as fast as among the rich. But why? The rising cost of college (and even of college textbooks!) surely explains part of the problem. Tuition costs have nearly sextupled over the past three decades. Textbook prices are up even more -- an astounding 812 percent increase in 30 years. And with the majority of parents leaving it to their kids to buy their own textbooks -- which can cost as much as $1,200 a year for a full course load -- this alone could push some kids to take on some debt.