Q: I have a Vanguard account and have been following your recommendations with the nine different asset classes that you recommend in Financial Fitness Forever. This year I noticed the Emerging Markets Fund VEIEX has not done very well but every other fund has had a good return. I’m just wondering, do you still recommend VEIEX as part of your Vanguard recommendations? I am a long time listener of your podcasts and reader of your books. Thanks for giving me the knowledge and confidence to take on my own investments!
A: The best approach to diversification is to build a portfolio of asset classes that have a long history of good returns (none of them are without long periods of under performance) but don’t go up and down together.
In 2003 the Vanguard Emerging Market Fund was up 57.7% and up 13.3 % for the last 12 months. During 2003 the Vanguard S&P 500 was up 28.5% and it was up 24.4% for the last 12 months. We should not expect these great asset classes to move up and down together or at the same rates. I still think emerging markets will have a good long term record but I don’t expect them to go up and down at the same time as the other asset classes in your portfolio. If we sell out once an asset class when it doesn’t do what we expect, we will eventually end up with a portfolio of money market funds, as all asset classes have periods of disappointing returns.