Got burn with Emerging Market Funds in 401K (credit, raising cash, investments)

[MattNguyen]

I bought in the idea of the decline of the US economy and the US dollar due to the massive trade deficit, national debt and printing of the dollar so I put half of my 401K money into an Emerging Market Fund. Last year while my colleagues earned 20% to 25% in their 401K accounts; my account gained about 8%. 45% of my 401K money is still in the same Emerging Market Fund. Do I pull back now or bite the bullet and keep it there? My fear is that the US market will pull back after the spectacular gain and Emerging Market will come alive after two years of bad performance.

[mathjak107]

no one knows the answer.

[EmeraldCityWanderer]

It's tough to say, they could go gangbusters next year or keep puttering along. They have so much variablility a dartboard would be as good of a predictor. There are a number of personalities that say it will be an important year as larger markets recover, and economies start buying more...but they are often as good as the dartboard as well.

My personal opinion is if you have a long time frame, say you are in your 20's or early 30's...leave them. You are overbalanced in some of the highest risk instraments you can get into in a 401K so you might want to lower (or even stop) contributions there and put them more into stable index investments. The US might not keep up the large gains it has been doing, as you can see the average US market gain is 10%...and recently it has been 25%+...things tend to pull back to the average in longer statistical time frames.

You don't want to keep a loser, but you also don't want to jump around a lot chasing gains. It's a tough balancing act most people spend their lives trying to tweak. Best of luck.

[celcius]

You just learned a very powerful lesson:

The economy and the stock market are not linked.

[acgood]

I would allocate your account into an appropriate diversified portfolio (including some to EM) that is reflective of your personal situation and long-term goals. Then don't mess with it except to rebalance as needed. So yes, that would involve cashing out a chunk of the EM fund now

[icicles]

Originally Posted by MattNguyen

I bought in the idea of the decline of the US economy and the US dollar due to the massive trade deficit, national debt and printing of the dollar so I put half of my 401K money into an Emerging Market Fund. Last year while my colleagues earned 20% to 25% in their 401K accounts; my account gained about 8%. 45% of my 401K money is still in the same Emerging Market Fund. Do I pull back now or bite the bullet and keep it there? My fear is that the US market will pull back after the spectacular gain and Emerging Market will come alive after two years of bad performance.

I think you are probably right. The US is printing a lot of money but M3 credit is being destroyed at the same time. Also, other countries are all printing like crazy. The value of the dollar in relation to other currencies might not change much, but value against commodities or other things will change.

The problem is M3 credit is being destroyed and M0 being created. M3 only goes up when it is loaned out, then you get the velocity of money going down so they can create so much M0.

Gold is a good bet IMO because it works in deflation and inflation. These are the two forces fighting each other, but ultimately the fed/government will need inflation since debt doesn't deflate, so I would side that inflation will win in the end. I am lightly exposed to commodity producers, been getting more heavily weighted in gold, and maintain a good weighting in stocks from all over the world (small, large-cap, international, emerging markets). I have been raising cash as well in my 401K and taking profits from those areas who have done extremely well.

[BigCityDreamer]

Originally Posted by MattNguyen

I bought in the idea of the decline of the US economy and the US dollar due to the massive trade deficit, national debt and printing of the dollar so I put half of my 401K money into an Emerging Market Fund. Last year while my colleagues earned 20% to 25% in their 401K accounts; my account gained about 8%. 45% of my 401K money is still in the same Emerging Market Fund. Do I pull back now or bite the bullet and keep it there? My fear is that the US market will pull back after the spectacular gain and Emerging Market will come alive after two years of bad performance.

U.S. economic decline is highly overrated.

Yet people keep buying into the idea for some reason.

[MountainBiking]

Stay the course.

-Cheers.

[mysticaltyger]

Originally Posted by MattNguyen

I bought in the idea of the decline of the US economy and the US dollar due to the massive trade deficit, national debt and printing of the dollar so I put half of my 401K money into an Emerging Market Fund. Last year while my colleagues earned 20% to 25% in their 401K accounts; my account gained about 8%. 45% of my 401K money is still in the same Emerging Market Fund. Do I pull back now or bite the bullet and keep it there? My fear is that the US market will pull back after the spectacular gain and Emerging Market will come alive after two years of bad performance.

FYI, you got "burned" not "got burn".

I think the criteria you are using for investing in emerging markets (or not) is faulty. You should NOT judge on just one or 2 years' performance. Emerging markets stocks are actually pretty reasonably priced compared to stocks in the U.S. right now. That doesn't mean they can't fall further, but their long term return potential is actually pretty good, probably better than U.S. stocks because of the current high-ish valuation of U.S. stocks.

However, the much more important factor is whether you have a truly diversified portfolio. I think 45% in emerging markets is too much for any portfolio. I have 10% in Oppenheimer Emerging Markets in my plan. I assume you have the same fund as this fund went up just over 8% last year. It's an excellent fund....It did better than most emerging markets stock funds...but 45% in emerging markets is simply too much even if they had a blowout year. This asset class is just too volatile for most people. I'd say you probably don't want to have more than 20% in this asset class, and probably less.

[icicles]

I vote to leave it. If it went gangbusters like the US large cap did this year, I would lighten up (which I am doing).

I was heavy into emerging markets a while back, they went gangbusters and I lightened up on them. Right now go after what is down (emerging markets) and gold.