Jeremy Siegel's 1/3, 1/3, 1/3 diversification

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Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by singletond » Fri Feb 08, 2013 8:29 am

On Squawk Box this morning Jeremy Siegel was quizzed about academic's recommending "owning the world". He said he owned 1/3 US, 1/3 emerging markets and 1/3 rest of the world.

We have 40-45% outside the US and I thought that was a lot. How common is it for Bogleheads to have around 2/3 of the portfilio outside the US?

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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by wesleymouch » Fri Feb 08, 2013 8:37 am

We just follow the allocation of the total world ETF - VT. It is about 45% North America

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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by nisiprius » Fri Feb 08, 2013 9:12 am

Burton Malkiel, author of A Random Walk Down Wall Street, describes himself as "one who has been smitten with the gambling urge since birth." I do not know whether Professor Siegel has ever commented on his own risk tolerance, but I think it is reasonable to surmise that people are attracted to the investment world because they a personal taste for risk. Thus, they are apt to be at the aggressive end of the risk tolerance spectrum, and to have "decreasing relative risk aversion." That is, they react to increased wealth by saying "Great! Now I can afford to gamble a bit," as opposed to people who say "Great! Now that I've won the game, I'll stop playing."

Knowing Siegel's constant cheerleading for stocks and, for at least the last three years, repeatedly crying "wolf!" about bonds, I assume that his personal investment allocation is 100% stocks.

I do not think there can be any serious question that his 1/3, 1/3, 1/3 allocation involves distinctly more risk than a 100% U. S. stock allocation. The additional risks of international investing in general and emerging markets in particular are acknowledged in every prospectus, and Vanguard puts their international funds in risk potential category 5, whereas Total [U.S.] Stock Market Index is in category 4.

Certainly, a sane person could judge that it is a calculated risk and that they are willing to take it in order to increase their chances of reward. As for diversification, it might make the total risk of the portfolio less risky than the sum of the risk of its parts, but it is not credible that the diversification effect would make such a portfolio safer; I am sure Professor Siegel did not claim that. Even the most casual glance at the behavior of Vanguard
Total Stock,
Total World,
[International] Developed Markets, and
Emerging Markets during 2008-2009 makes this clear. The global diversification of the Total World fund did not reduce the size of the drop, and overweighting Emerging Markets would only have made things worse.

Image

It's not a huge amount of extra risk, but it's more risk, not less. It may well have a better reward-for-risk relationship, but, again, it is more risk, not less.

In short, Professor Siegel's portfolio sounds quite suitable for someone with a secure tenured academic job, probably a decent chunk of wealth from royalties and his consulting at WisdomTree, and decreasing relative risk aversion."

DId he say that it was a suitable model for everyone?
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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by Call_Me_Op » Fri Feb 08, 2013 9:28 am

I suspect few Bogleheads have 2/3 in non-US equities. I have 50% in non-US and 25% in EM, and that is toward the high end. But I do not hold anywhere near 100% of my portfolio in equities, so I tilt because my equity allocation is on the low side.
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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by larryswedroe » Fri Feb 08, 2013 10:12 am

IMO good starting place is how world allocates capital. Then have small home bias because international investing is bit higher costs and bit less tax efficient. That would argue for 50% US and 50% international (which is what I recommend). Then the other 50% is about 3:1. So say 37.5% developed and 12.5% EM.

EM has lower correlation and higher expected returns so you might want to consider tilting, but recognizing the risks

Hope that helps
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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by pkcrafter » Fri Feb 08, 2013 10:20 am

The big allocation to EM smacks of recency bias.

Nisiprius wrote:
Burton Malkiel, author of A Random Walk Down Wall Street, describes himself as "one who has been smitten with the gambling urge since birth." I do not know whether Professor Siegel has ever commented on his own risk tolerance, but I think it is reasonable to surmise that people are attracted to the investment world because they a personal taste for risk
.
That would be an interesting topic for a new discussion.

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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by KyleAAA » Fri Feb 08, 2013 10:29 am

I have 50/50 US/foreign equities; however, about 40% of my foreign equities are in emerging markets (about 20% of total equities, or double the global market weight). So I guess you could say I have a high risk tolerance.

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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by dbr » Fri Feb 08, 2013 10:34 am

A really good asset allocation plan is the 1/N scheme. Figure out what the asset classes are you think you want. Count how many you came up with, N. Allocate 1/N to each.

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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by G-Money » Fri Feb 08, 2013 10:47 am

dbr wrote:A really good asset allocation plan is the 1/N scheme. Figure out what the asset classes are you think you want. Count how many you came up with, N. Allocate 1/N to each.
Agreed. I've tinkered with different percentages, but it's hard to beat equally dividing up asset classes for simplicity. For me, managing 5 or even 10% slices seemed to be more trouble than it was worth.

I also appreciate the naivety of equal weighting. Using more precise percentages implies that the optimal portfolio is knowable in advance. I don't believe that it is.
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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by EternalOptimist » Fri Feb 08, 2013 11:04 am

I have roughly 15-20% of my equities in international. My gut says the US is a better place for me.
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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by nisiprius » Fri Feb 08, 2013 11:08 am

dbr wrote:A really good asset allocation plan is the 1/N scheme. Figure out what the asset classes are you think you want. Count how many you came up with, N. Allocate 1/N to each.
I can't tell if that's ironic or not.

The obvious problem: what counts as an asset class?

Plan X:

1/7 stocks
1/7 corporate bonds
1/7 Treasury bonds
1/7 Treasury notes
1/7 Treasury bills
1/7 TIPS
1/7 international bonds

Plan Y:

1/7 small-cap value stocks
1/7 REITS
1/7 emerging markets stocks
1/7 consumer staples stocks
1/7 dividend stocks
1/7 Pacific mid-cap growth stocks
1/7 bonds

Plan Z:
1/7 stocks
1/7 bonds
1/7 collectible Beanie babies
1/7 Pez dispensers
1/7 Thomas Kinkade, Painter of Light® Master Highlighted pictures
1/7 Bradford Exchange Thomas Kinkade, Painter of Light® genuine limited edition ceramics, without wind-up mechanisms
1/7 Bradford Exchange Thomas Kinkade, Painter of Light® genuine limited editions ceramics, with wind-up rotating mechanisms
Last edited by nisiprius on Fri Feb 08, 2013 11:14 am, edited 2 times in total.
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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by FillorKill » Fri Feb 08, 2013 11:10 am

nisiprius » Fri Feb 08, 2013 12:08 pm

dbr wrote:
A really good asset allocation plan is the 1/N scheme. Figure out what the asset classes are you think you want. Count how many you came up with, N. Allocate 1/N to each.I can't tell if that's ironic or not.
I'm fairly certain it was a sarcastic reference to 'naive diversification'. I could be wrong.

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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by Browser » Fri Feb 08, 2013 11:13 am

Higher risk should = Higher returns (eventually) IF you can handle the consequences of the risk part AND can wait long enough for eventually to happen.
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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by RenoJay » Fri Feb 08, 2013 11:43 am

nisiprius wrote:
dbr wrote: Plan Z:
1/7 stocks
1/7 bonds
1/7 collectible Beanie babies
1/7 Pez dispensers
1/7 Thomas Kinkade, Painter of Light® Master Highlighted pictures
1/7 Bradford Exchange Thomas Kinkade, Painter of Light® genuine limited edition ceramics, without wind-up mechanisms
1/7 Bradford Exchange Thomas Kinkade, Painter of Light® genuine limited editions ceramics, with wind-up rotating mechanisms
Done and done. I just sent my broker the buy order for the Kinkade pictures. He said the ask/bid spread on beanie babies was unusually wide and suggested we wait til Asian markets open so there'd be more liquidity.

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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by dbr » Fri Feb 08, 2013 12:30 pm

BBL wrote:
nisiprius » Fri Feb 08, 2013 12:08 pm

dbr wrote:
A really good asset allocation plan is the 1/N scheme. Figure out what the asset classes are you think you want. Count how many you came up with, N. Allocate 1/N to each.I can't tell if that's ironic or not.
I'm fairly certain it was a sarcastic reference to 'naive diversification'. I could be wrong.
Of course it's sarcasm. It drives me nuts when these guru's present these 1/N recommendations as if there is some profound meaning to be expressed in them. I have no problem with Siegel making an argument for more or less allocation in some direction or another, but expressing that in kindergarten drawings like that is an insult to people's intelligence.

Anyway, as everyone knows, asset allocations must always be in prime number percentages and 33 is not prime; 3 x 33 does not add to 100 either. None of the integer divisions of 100 bigger than 5%, namely 50, 25, 20, and 10 are prime anyway so the 1/N scheme is proven to be impossible to implement. Even worse the numbers of asset classes that can follow 1/N and add to 100 are 1, 2, 4, 5, 10, 20, 25, 50, and 100, so one is quite challenged to identify exactly the right number of asset classes to complete the scheme even without primes.

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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by Lieutenant.Columbo » Wed Apr 25, 2018 9:49 pm

nisiprius wrote:
Fri Feb 08, 2013 9:12 am
It's not a huge amount of extra risk, but it's more risk, not less. It may well have a better reward-for-risk relationship, but, again, it is more risk, not less.

In short, Professor Siegel's portfolio sounds quite suitable for someone with a secure tenured academic job, probably a decent chunk of wealth from royalties and his consulting at WisdomTree, and decreasing relative risk aversion."

DId he say that it was a suitable model for everyone?
Just did CPR on this Topic so that I could ask nisiprius what the big deal with the risk of investing in Ex-US stocks is if one simply does not sell at the wrong time. Thank you
Of course, I do understand the "if I do not sell when it's down I do not lose anything" argument does not only apply to Ex-US stocks but (probably) to any asset class.
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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by columbia » Wed Apr 25, 2018 10:07 pm

Browser wrote:
Fri Feb 08, 2013 11:13 am
Higher risk should = Higher returns (eventually) IF you can handle the consequences of the risk part AND can wait long enough for eventually to happen.
Naive question:

Is there evidence that investing in “higher risk” equities (as opposed to say the SP500), in fact led to higher returns over the long run? If so, what is the timeframe for the long run?

My memory is that SCV does fit that description, but EM (seemingly the riskiest of the three), does not.

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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by Day9 » Wed Apr 25, 2018 10:46 pm

A few years ago Mr Swedroe recommended on this board for someone who wanted to tilt more toward international and emerging markets due to higher expected returns due to valuations:
So with global market cap at 50% international (1/4 of that being EM) might go to say 60% and 1/3 of that EM. But be sure you can live with that TE.
TE=Tracking Error. This means the equity allocation would be 40% US, 40% Developed international, 20% Emerging Markets
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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by heyyou » Wed Apr 25, 2018 11:00 pm

1/N suits me. Others should do whatever suits them.

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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by nisiprius » Thu Apr 26, 2018 7:38 am

A theory that makes some sense to me is that "higher risk should mean higher returns, because investors demand it and, other things being equal, will not pay as much for higher risk investments." The theory needs to be adjusted, though, because I can think of no reason why investors should be rewarded for risk that they do not need to take. On the face of it, currency risk is just such a risk. A German investor doesn't incur currency risk investing in German stocks, so why should I get a higher return for incurring the volatility of the US/Euro exchange rate in addition to the same risks that the German investor takes?

There could be an answer to this question--for example, there may not be enough Eurozone investors to buy all the stock that a Eurozone company wants to sell, so the price might drop to the point where it induces US investors to come in and take the additional risk. I'm not an economist, I don't know. I think it still leads to a conclusion that other things being equal, US stocks should be better investments than German stocks for US investors, and German stocks should be better investments for German investors than US stocks.

Currency exchange adds friction, and doesn't add any return of its own. It can't be as simple as "international stocks add diversification, so they are automatically and simply an improvement." It has to be a balance, diversification plus against currency exchange minus, and I don't know the law of physics that proves that the plus automatically, always, and necessarily outweighs the minus.
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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by dbr » Thu Apr 26, 2018 8:13 am

singletond wrote:
Fri Feb 08, 2013 8:29 am
On Squawk Box this morning Jeremy Siegel was quizzed about academic's recommending "owning the world". He said he owned 1/3 US, 1/3 emerging markets and 1/3 rest of the world.

We have 40-45% outside the US and I thought that was a lot. How common is it for Bogleheads to have around 2/3 of the portfilio outside the US?

Dave
If you interpret his statement about what he owns as a recommendation for what you should own, then you are making a big mistake. Part of the mistake is deciding on an asset allocation by asking people what they own, even if it is Siegel, maybe especially if it is Siegel (see post above by Nisiprius). The same comment would extend to owning what Buffett owns (the infamous 90% S&P 500) or even what Bogle owns. I wouldn't even recommend someone else own what I own.

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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by patrick013 » Thu Apr 26, 2018 12:39 pm

Image

What some people don't know is that the 500 has about 30%
foreign exposure. So when debating how much AA should
be foreign well it already is about 30% based on revenue.
Appears to be diversified into major foreign areas and some
smaller geographic areas as well. Separate funds for Intl
would make withdrawals easier but it seems about half of all
large caps have reportable foreign business activity.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by Lauretta » Thu Apr 26, 2018 1:32 pm

nisiprius wrote:
Thu Apr 26, 2018 7:38 am
A theory that makes some sense to me is that "higher risk should mean higher returns, because investors demand it and, other things being equal, will not pay as much for higher risk investments." The theory needs to be adjusted, though, because I can think of no reason why investors should be rewarded for risk that they do not need to take. On the face of it, currency risk is just such a risk. A German investor doesn't incur currency risk investing in German stocks, so why should I get a higher return for incurring the volatility of the US/Euro exchange rate in addition to the same risks that the German investor takes?

There could be an answer to this question--for example, there may not be enough Eurozone investors to buy all the stock that a Eurozone company wants to sell, so the price might drop to the point where it induces US investors to come in and take the additional risk. I'm not an economist, I don't know. I think it still leads to a conclusion that other things being equal, US stocks should be better investments than German stocks for US investors, and German stocks should be better investments for German investors than US stocks.

Currency exchange adds friction, and doesn't add any return of its own. It can't be as simple as "international stocks add diversification, so they are automatically and simply an improvement." It has to be a balance, diversification plus against currency exchange minus, and I don't know the law of physics that proves that the plus automatically, always, and necessarily outweighs the minus.
Well William Sharpe strictly uses market cap weighing without currency hedging (he doesn't even have currency hedging for foreign bonds)
https://www.youtube.com/watch?v=XsXOLZ9U7jI
I personally deviate very significantly from the global portfolio, both because of currency considerations (I am in the Eurozone) and because of valuations; but it seems to me that if one believes the academic theories of efficient markets, CAPM and MPT and wants to be consistent, one ought to have a global portfolio like Prof. Sharpe...
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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by pascalwager » Fri Apr 27, 2018 6:25 pm

Lauretta wrote:
Thu Apr 26, 2018 1:32 pm

Well William Sharpe strictly uses market cap weighing without currency hedging (he doesn't even have currency hedging for foreign bonds)
https://www.youtube.com/watch?v=XsXOLZ9U7jI
I personally deviate very significantly from the global portfolio, both because of currency considerations (I am in the Eurozone) and because of valuations; but it seems to me that if one believes the academic theories of efficient markets, CAPM and MPT and wants to be consistent, one ought to have a global portfolio like Prof. Sharpe...
Sharpe considers the world bond/stock portfolio (WBS) a starting point, or maybe a default risk portfolio for many retirees (along with TIPS). If you want to increase the stocks portion, then that's an acknowledged additional risk, but it's still investing. There are also tax reasons for many other modifications. He doesn't expect every investor to hold the WBS only.

In fact, Formula 15, in his AAA paper is a tool for making proportion modifications to the WBS and numerous other portfolios.

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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by stemikger » Fri Apr 27, 2018 6:34 pm

heyyou wrote:
Wed Apr 25, 2018 11:00 pm
1/N suits me. Others should do whatever suits them.
+1

Very true. You have to do what feels comfortable to you and enables you to stay the course. I'm 100% U.S. like Jack suggests. I'm very comfortable with international diversification I get in the S&P 500 Index.
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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by Lauretta » Fri Apr 27, 2018 6:38 pm

pascalwager wrote:
Fri Apr 27, 2018 6:25 pm


In fact, Formula 15, in his AAA paper is a tool for making proportion modifications to the WBS and numerous other portfolios.
thanks for the feedback; is that on the web and if so do you have a link?
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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by pascalwager » Fri Apr 27, 2018 6:47 pm

Lauretta wrote:
Fri Apr 27, 2018 6:38 pm
pascalwager wrote:
Fri Apr 27, 2018 6:25 pm


In fact, Formula 15, in his AAA paper is a tool for making proportion modifications to the WBS and numerous other portfolios.
thanks for the feedback; is that on the web and if so do you have a link?
The first link is his RISMAT paper. See especially Section 7 and others. The second link is his AAA paper. See formula 15 table.

https://web.stanford.edu/~wfsharpe/RISMAT/

https://web.stanford.edu/~wfsharpe/aaap/wfsaaap.pdf

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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by JoMoney » Fri Apr 27, 2018 9:38 pm

columbia wrote:
Wed Apr 25, 2018 10:07 pm
... Is there evidence that investing in “higher risk” equities (as opposed to say the SP500), in fact led to higher returns over the long run? If so, what is the timeframe for the long run?...
Not all risks are considered to have a "premium", but under the premises of EMH, if one earns a higher return it's a result of taking additional risks.
The broad market has "market risk" measured as "beta", but high beta stocks have not had higher returns, in fact the opposite seems to be true with low-beta stocks showing higher returns.
To keep the EMH alive, they've gone back to the drawing board to try and find other measures of risk/reward and come up with things like exposure to small and value stocks as being the measure "risk".
I'm a big fan of low-cost broad market indexing. The market is very competitive, and definitely hard to beat, but the most successful investors I've heard from, seem to have gotten there from carefully trying to avoid risk, not ratcheting it up.
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Re: Jeremy Siegel's 1/3, 1/3, 1/3 diversification

Post by pascalwager » Fri Apr 27, 2018 10:10 pm

JoMoney wrote:
Fri Apr 27, 2018 9:38 pm
columbia wrote:
Wed Apr 25, 2018 10:07 pm
... Is there evidence that investing in “higher risk” equities (as opposed to say the SP500), in fact led to higher returns over the long run? If so, what is the timeframe for the long run?...
Not all risks are considered to have a "premium", but under the premises of EMH, if one earns a higher return it's a result of taking additional risks.
The broad market has "market risk" measured as "beta", but high beta stocks have not had higher returns, in fact the opposite seems to be true with low-beta stocks showing higher returns.
To keep the EMH alive, they've gone back to the drawing board to try and find other measures of risk/reward and come up with things like exposure to small and value stocks as being the measure "risk".
I'm a big fan of low-cost broad market indexing. The market is very competitive, and definitely hard to beat, but the most successful investors I've heard from, seem to have gotten there from carefully trying to avoid risk, not ratcheting it up.
Decades ago, I attended a Sierra Club backpacking clinic and heard a Palo Alto venture capitalist in conversation with some people. Someone asked about his line of work and "all that risk"--I don't recall the actual question--but he answered: "Oh no. I never take risk."

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