Investing strategy over the next year: BRICs and China (VWO, GXC, HAO, EPI)

A few weeks ago, I was fortunate enough to watch a video talk by Burton Malkiel, author of A Random Walk Down Wall Street and more recently, The Elements of Investing. In the talk, he reviewed his six fundamental strategies for successful investing and the data that supported these tenets:

1. Do not try to time the market
2. Use dollar cost averaging
3. Rebalance yearly
4. Diversify, diversify, diversify
5. Costs matter, and
6. Use index funds

I admit that although I’ve tried to follow all of the items above to some extent or another except for “rebalance yearly” but haven’t been good at consistently doing most of these over time. For example, most recently, I gave into fear and sold half my holdings at the wrong time, right in March 2009. That experience along with the wisdom of someone like Mr. Malkiel convinced me that I needed to adopt a long-term strategy that would alleviate emotions from getting into my investment decisions for at least the next year.

Focusing on the topics above, Mr. Malkiel highlighted “diversification” and how there’s a home country bias inherent in most people’s investment strategies. He pointed out that in France, most investor’s portfolios were made up of over 90% French companies although France makes about 2% of the world’s GDP. Like others, Mr. Malkiel favored China in particular and also Brazil and India as emerging markets that investors should have exposure to.

I did some research for a few weeks to determine which ETFs were the most efficient and had exposure to these markets. I chose ETFs due to their low fees, acknowledging that I would still have to rely on my own discipline to invest in these at the same time each month using dollar-cost averaging. I would gladly have chosen to use mutual funds instead had I been able to find some to invest in through Schwab that did not involve transaction fees or loads that gave me the same performance. (Specifically, I’m unable to invest in Vanguard funds via Schwab without paying $50 in transaction fees for every purchase, which is far more than the $9 I have to pay to invest in VWO for essentially the same investments). I would also have had to open a number of accounts at different firms in order to gain access to all the mutual funds that might mimic these ETFs’ performance since it’s unclear that any single firm has the combination I’m looking for. So, I’ll have to rely on my own discipline to invest in ETFs in the same manner each month in this case!

In the end, I decided to invest monthly into VWO (Vanguard Emerging Markets), GXC (SPDR S&P China ETF), HAO (Claymore/Alpha Shares China Small-Cap ETF, which Mr. Malkiel is associated with and has a greater exposure to consumer discretionary than GXC), and EPI (WisdomTree India Earnings ETF).

I had previously invested in EEM (iShares MSCI Emerging Markets Index Fund) as a means to get exposure into the emerging markets but discovered that VWO had a lower expense ratio for basically the same holdings and passive index tracking. Having both HAO and GXC gives me broader exposure into China than just holding one of the main ETFs alone (although I admit that this combination, together with VWO, puts me at risk of being more overweight in large Chinese firms than I would ideally like). Finally, there are 4 or so ETFs focused on India, and all of them unfortunately have fairly high expense ratios close to 1%, but I found I could not get exposure to India simply through most broad-ranged emerging markets ETFs.

My goal is to have about 30% exposure to China, 20% to Brazil, Russia, and India, and the rest in the US for now. This will still leave me some leeway as well to continue investing in a few, specific stocks and situations I find worth exploring specifically that might allow for greater opportunistic gains.

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