Emerging Markets Versus Developed Markets? What About All-World?

For 5 years, the more investors moved into international stock assets, the more growth they had seen in their portfolios. And typically, the more exposure one has had to "less developed countries," the better those results.

The desire for emerging market assets has grown so much, in fact, that many are showing interest in "frontier" markets; that is, they want to know what's going on in Viet Nam, Zimbabwe and Panama. (Who needs China or India!)

The increasing appetite for risk, however, may ultimately lead to destruction. On the one hand, you have those pining for the next great list of under-developed nations. On the other hand, you have Greenspan describing China in the same way that he described the 90s tech boom (i.e., irrational exuberance).

Of course, Greenspan's call on the dot-com bust vis-a-vis "irrational exuberance" came in 1996. That was 4 years early! It follows that few people are going to be willing to risk missing out on opportunities abroad -- opportunities that could last for days, months or years.

So my question is, "How should you do it?" Do you purchase a basket of emerging market stocks in the Vanguard Emerging Market Index (VWO). You'd be up 15% in the 2nd half of 2007. Or do you go with the developed Europe-Pacific region with the Vanguard Europe Pacific EAFE Index (VEA)? The latter has garnered 0% in the 2nd half of 2007.

My preference is the "Middle Path." And while I'd rather not sound ultra-Zen about my choice, I would like to make the case for Vanguard All-World (VEU).

VEU seeks to track the performance of the FTSE® All-World ex-US Index – an index designed to measure equity market performance of the global marketplace. More than 2200 stocks of companies located in 47 developed countries and emerging markets comprise this investment.

More importantly, Vanguard All-World (VEU) is able to give a total market cap solution for the ETF investor. Rather than decide upon a concoction of Vanguard Europe-Pacific (VEA) and Vanguard Emerging Markets (VWO), you can comfortably choose a single investment to give you the mix.

In truth, I hadn't looked favorably on the all-world concept in the past. In fact, I favored an investor choosing to make his/her own combination of "emerging" and "developed" based on risk tolerance.

Today, however, I see the same potential for irrational excitement in emerging markets that occurred in dot-euphoria and real estate mania. I'd rather invest in a sensible all-world fund and manage its risk accordingly.

That's not to say that I think there's anything wrong with the other funds. In fact, I wrote a glowing review of Vanguard Emerging Markets (VWO) this year. At the same time, it's difficult to ignore the simplicity of the all-world approach.

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