Equal Weighting
Equal Weighting
Hi Guys
If this has been covered please show me the link
I am looking to put my pension plan to max speed 100% equities as follows:
US index
UK index
European Index
Pacific ex Japan index
Japan Index
Emerging Markets index
Each index will take an equal weighting of the portfolio.I was looking at the Vanguard Global All Cap index however i'm unsure how I feel about 50% of it being allocated to the U.S . I am aware that the U.S is the worlds biggest economy and does most of its business overseas however you are still taking a bet on that countries policies .
What are the thoughts on equal weighting ?I cant seem to find much on it .
Note:I have 30+ years to retirement,don't fear volatility and adopt the Harry Browne PP for my main savings .
Thank you in advance
If this has been covered please show me the link
I am looking to put my pension plan to max speed 100% equities as follows:
US index
UK index
European Index
Pacific ex Japan index
Japan Index
Emerging Markets index
Each index will take an equal weighting of the portfolio.I was looking at the Vanguard Global All Cap index however i'm unsure how I feel about 50% of it being allocated to the U.S . I am aware that the U.S is the worlds biggest economy and does most of its business overseas however you are still taking a bet on that countries policies .
What are the thoughts on equal weighting ?I cant seem to find much on it .
Note:I have 30+ years to retirement,don't fear volatility and adopt the Harry Browne PP for my main savings .
Thank you in advance
Re: Equal Weighting
If you did this allocation you are under-weighting the US and over-weighting the UK, Europe, and Japan. Why?
In Behavioral Economics this is refereed to as "Naive Allocation". Lots of people chose it. On the plus side it is easy to do. On the down side there is no rational for it and it tends to lead to sub-optional returns.
The neutral position is to hold the market weight of each asset class and then tilt according to your views.
In Behavioral Economics this is refereed to as "Naive Allocation". Lots of people chose it. On the plus side it is easy to do. On the down side there is no rational for it and it tends to lead to sub-optional returns.
The neutral position is to hold the market weight of each asset class and then tilt according to your views.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Equal Weighting
If you give all equal weight you are giving smaller economies more comparative weight than the US. While it's possible that smaller economies could soar and outgrow the US I don't think they all will. A wide recession could impact smaller economies greater than the US which has more diversity. I'd probably go at least 50% in the USA fund.
The closest helping hand is at the end of your own arm.
Re: Equal Weighting
Even if you don't fear volatility, it's still a tool you should leverage.
The portfolio you propose is making an active bet against U.S stocks (which account for roughly half of the world's market cap) and includes some funds that are highly correlated (probably no need to own both UK and Europe funds, for instance, or both Japan and Pacific funds).
You could increase your exposure to U.S. stocks AND add small cap exposure AND better diversify by swapping out the redundant funds with a U.S. small cap value fund. Even if you wanted to equal weight the funds (and, from a volatility management perspective that's not inherently terrible), you could have a simpler portfolio that likely performs at least as well with something like this:
VTI Vanguard Total Stock Market ETF 20.00%
EWU iShares MSCI United Kingdom ETF 20.00%
EWJ iShares MSCI Japan ETF 20.00%
VWO Vanguard FTSE Emerging Markets ETF 20.00%
SLYV SPDR S&P 600 Small Cap Value ETF 20.00%
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Re: Equal Weighting
I think that step one should be for you to understand what exactly the market is. Then when you propose something like this, you can backcheck what your proposed allocations are in comparison to what the world market would give you. You can come up with a amazing group of categories .... why don't you add a) Indonesian Growth Stocks b) Hong Kong Real Estate and c) Kuwati Small Caps to your list of "categories" and then equally weight among the result? I hope you recognize the sarcasm .... doing what you are suggesting is a REALLY BAD IDEA.
Re: Equal Weighting
Ok guys thank you for the information.
It was just a little research.What I think I may end up doing is going 100% into the Vanguard fund mentioned.I wanted something that would track the global economy as a whole so I guess that's not a bad idea!
Many thanks for the replies!
It was just a little research.What I think I may end up doing is going 100% into the Vanguard fund mentioned.I wanted something that would track the global economy as a whole so I guess that's not a bad idea!
Many thanks for the replies!
- Tyler Aspect
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Re: Equal Weighting
I would skip the international selections in your pension plan. Its setup is too complicated. Having a developed market index in the taxable account or a Roth IRA should be the preferred move. Asset allocation is all about coming up with a suitable weighting. Equal weighting won't do at all.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.
Re: Equal Weighting
Appologies Tyler I am UK based , we have slightly different systems here .We cannot take our pensions until age 55 but will be more like 66 due to government changes looming.We then have an ISA for ordinary savings that we can put 20k/year into and not pay any tax on what happens inside that account, I.E capital appreciation and dividends.Tyler Aspect wrote: ↑Mon May 21, 2018 8:25 pm I would skip the international selections in your pension plan. Its setup is too complicated. Having a developed market index in the taxable account or a Roth IRA should be the preferred move. Asset allocation is all about coming up with a suitable weighting. Equal weighting won't do at all.
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Re: Equal Weighting
Seems similar to Merriman's portfolio. IMO, all the slices just dilute one another. Much simpler to own total stock and pick one or two factors that you can commit to.
Re: Equal Weighting
Aye had a look at that .Will just stick to the Global All Cap,tbh I may not make 66,I ride my motorcycle too fast!aristotelian wrote: ↑Mon May 21, 2018 8:58 pm Seems similar to Merriman's portfolio. IMO, all the slices just dilute one another. Much simpler to own total stock and pick one or two factors that you can commit to.
I am however impressed with Harry Brownes methods!With all the chaos going on in the UK with Brexit it seems the safest option!
Re: Equal Weighting
I wrote a longer blog entry about equal-weighting:
https://medium.com/@justusjp/the-magic- ... c58e1e1da0 including talking
with a slight follow upOptimal Versus Naive Diversification: How Inefficient is the 1/N Portfolio Strategy?” by DeMiguel, Garlappi, and Uppal in the 2009 The Review of Financial Studies looks at 14 models across 7 different datasets and compare them to the “naive” equal-weighting. What they are trying to answer is: is finding the “optimal” portfolio worth it? They wrap up with:
"From the above discussion, we conclude that of the strategies from the optimizing models, there is no single strategy that always dominates the 1/N strategy"
https://medium.com/@justusjp/the-challe ... 7eb9c904ca
In A Practitioner's Guide to Asset Allocation they strongly disagree with this but I found the book pretty opaque and couldn't finish it.
Re: Equal Weighting
I just read your two blog articles on equal weighting. In the second one, I think you put your finger on the problem. Equal weighting appeals since it seems to be the "no bias" (or "maximum entropy" or a variety of other names) choice. The bias comes in from the completely arbitrary choice that one has to make for what the asset classes exactly are.AlohaJoe wrote: ↑Mon May 21, 2018 9:19 pmI wrote a longer blog entry about equal-weighting:
https://medium.com/@justusjp/the-magic- ... c58e1e1da0 including talking
with a slight follow upOptimal Versus Naive Diversification: How Inefficient is the 1/N Portfolio Strategy?” by DeMiguel, Garlappi, and Uppal in the 2009 The Review of Financial Studies looks at 14 models across 7 different datasets and compare them to the “naive” equal-weighting. What they are trying to answer is: is finding the “optimal” portfolio worth it? They wrap up with:
"From the above discussion, we conclude that of the strategies from the optimizing models, there is no single strategy that always dominates the 1/N strategy"
https://medium.com/@justusjp/the-challe ... 7eb9c904ca
In A Practitioner's Guide to Asset Allocation they strongly disagree with this but I found the book pretty opaque and couldn't finish it.
I take issue with your conclusion of the first blog post, that we should view the equal weighted portfolio as the "benchmark". The same issue comes up there ... which equal weighted portfolio are we talking about? The asset class decision is crucial and depending on which ones you choose, you obtain completely different portfolios. I would think that the obvious benchmark would be the "market portfolio". Thoughts?
Re: Equal Weighting
That wasn't my conclusion, that was just a quote from the paper.
But to attempt to channel the authors and provide an answer: if the first article their focus isn't really about choosing which assets to use; it is about choosing how to weight those assets relative to one another. So they might say something like:
The Three-Fund Portfolio chose three assets -- intermediate term US bonds, total US market, and total ex-US market. Except it decided to weight them at 40-40-20. The proper benchmark for that should be an equal weighted portfolio -- 33-33-33 -- to see whether the US tilt is significant, persistent, whatever you want to be benchmarking.
Likewise people sometimes pick an asset allocation that looks something like: 40% bonds, 30% US stocks, 20% international stocks, 10% REITs. I think the authors would suggest that the "benchmark" for that should be 25% bonds, 25% US stocks, 25% international stocks, 25% REITs. Or if you want to leave bonds out of it maybe keep the 40% bonds but then the other three are split as 33% US stocks, 33% international stocks, 33% REITs.
One thing I personally find beneficial from thinking about things this way is it makes me really question the assets I choose to hold. Why do I feel so uncomfortable with a 33% allocation to REITs? Why am I okay with a 10% allocation to REITs but not a 33% allocation? I mean, there are maybe good reasons to not hold equal-weighted -- I'm not 100% convinced myself -- but I think it is a pretty good starting position when thinking about portfolio construction.
The whole thing also suggests that worrying about +/- 10% allocation to assets, something we see almost daily here, is probably pointless. "Should I hold 10% EM or 15%?????"
Re: Equal Weighting
Thank you for your response. The closing bits of your response however do make it sound as if this is your opinion?AlohaJoe wrote: ↑Tue May 22, 2018 9:13 amThat wasn't my conclusion, that was just a quote from the paper.
But to attempt to channel the authors and provide an answer: if the first article their focus isn't really about choosing which assets to use; it is about choosing how to weight those assets relative to one another. So they might say something like:
The Three-Fund Portfolio chose three assets -- intermediate term US bonds, total US market, and total ex-US market. Except it decided to weight them at 40-40-20. The proper benchmark for that should be an equal weighted portfolio -- 33-33-33 -- to see whether the US tilt is significant, persistent, whatever you want to be benchmarking.
Likewise people sometimes pick an asset allocation that looks something like: 40% bonds, 30% US stocks, 20% international stocks, 10% REITs. I think the authors would suggest that the "benchmark" for that should be 25% bonds, 25% US stocks, 25% international stocks, 25% REITs. Or if you want to leave bonds out of it maybe keep the 40% bonds but then the other three are split as 33% US stocks, 33% international stocks, 33% REITs.
One thing I personally find beneficial from thinking about things this way is it makes me really question the assets I choose to hold. Why do I feel so uncomfortable with a 33% allocation to REITs? Why am I okay with a 10% allocation to REITs but not a 33% allocation? I mean, there are maybe good reasons to not hold equal-weighted -- I'm not 100% convinced myself -- but I think it is a pretty good starting position when thinking about portfolio construction.
The whole thing also suggests that worrying about +/- 10% allocation to assets, something we see almost daily here, is probably pointless. "Should I hold 10% EM or 15%?????"
Do you not see the counter argument here? That the splitting of the market pie into "asset classes" is a completely arbitrary exercise. I could choose for example as my asset classes to be the 26 asset classes formed by choosing the stock or bond funds first letter ... i.e. every stock or bond whose SEC name begins with the first letter "M" is the "M" asset class. There is an extreme example but it gets the point across, doesn't it? So arguing for equal weighting across any set of arbitrarily chosen asset classes is still arbitrary.
Last edited by pezblanco on Tue May 22, 2018 3:12 pm, edited 1 time in total.
Re: Equal Weighting
I suggest you put [UK] in the title. Thus will ensure that our UK knowledgeable members will notice your post.
ALso, do a search for other posts with UK in the title.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). |
Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles