Bill Sharpe's preferred portfolio

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pascalwager
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Mon Jul 10, 2017 12:24 pm

aj76er wrote:By constantly adjusting your holdings based on market cap for US Stocks and exUS Stocks, it seems like you would always be buying and selling at the wrong time. In essence, you'd be chasing where capital is being allocated in the world. How would rebalancing in this way allow you to mechanically buy low and sell high, like holding fixed percentages does?

Taking a different spin on this, imagine doing the same thing with a subset of the US market. Take the market weighting of your favorite SCV index, and constantly change the percent of your portfolio based on it's market cap related to the S&P500. When SCV is doing well and popular, you'd hold more of it; when it was doing poorly and unpopular, you'd hold less. Seems completely backwards from what you should be doing.

I think fixed percentages of asset classes based on individual tastes and circumstances are the way to go.

I'd be interested in the back-testing data that either confirms or denies this
Sharpe is specifically opposed to fixed ratio rebalancing. It may be effective in shorter-term reversing markets, but not in longer-term trending markets. Also, selling high and buying low requires another trader who is buying high and selling low–two opposing strategies. Which is dumb and which is smart?

If an investor wants to make an active bet and depart from the market portfolio, that's fine, but the bet needs to be acknowledged and measured with respect to the market portfolio.

psteinx
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Re: Bill Sharpe's preferred portfolio

Post by psteinx » Mon Jul 10, 2017 12:26 pm

NiceUnparticularMan wrote:
bjr89 wrote:I'm just saying that same logic should probably then be applied to stocks, but often times it is not. That is, if the cap weighted bond market doesn't reflect the needs of an individual's circumstance, why should the cap weighted stock market... Why stop with bonds
In a multi-factor equity-risk/return model, I would tend to agree--it doesn't make much sense to assume the aggregate appetite for such risk/returns is the same as my appetite. That said, a single-factor model may be good enough for many investors, in which case a TSM approach can make sense.
Some reasons why one might "tilt" or slice and dice the bond market more than the equity market:

1) Bonds vary much more in taxation than equities do. A taxable investor would likely consider tax exempt munis, especially from their home state - a non-taxable investor would avoid them. Treasuries get a bit of a tax preference too.

2) There are, arguably, more reasons to hold specific bonds rather than a fund. But holding specific bonds strongly implies/suggests targeting, for various reasons, including liquidity.

3) Because bonds mature on a specific date (more or less - call features, etc.) there is a greater tendency to target one's bond holdings for certain fairly specifically known liabilities. This isn't generally an issue with equities.

4) There is a reasonable argument to be made that certain sectors of the bond market are noticeably affected by forced buyers - banks, foreign holders, and others who are heavily incentivized to hold specific types of bonds and/or avoid others. This might create opportunities for less constrained buyers to focus on the other parts of the market. (This can be true in equities also, but I suspect to a lesser extent across the whole spectrum of equities).

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CyberBob
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Re: Bill Sharpe's preferred portfolio

Post by CyberBob » Thu Jul 13, 2017 9:03 am

The June 30 end-of-quarter numbers are out for the indexes that Sharpe mentions in the video.
So to keep the portfolio allocations up-to-date for anyone who is interested, here are the numbers (in millions of USD):

25,089,806 - US stocks - CRSP US Total Market Index
22,271,698 - ex US stocks - FTSE Global All-Cap Index minus US
18,692,020 - US bonds - Citigroup US Broad Investment-Grade Index
17,870,770 - ex US bonds - Citigroup World Broad Investment-Grade Index minus US

So that equates to allocation percentages (rounded to the nearest whole number) of:

30% US stocks (ITOT, SCHB, THRK, VTI, etc.)
27% ex US stocks (IXUS, VXUS, etc.)
22% US bonds (AGG, BND, BNDS, SCHZ, etc.)
21% ex US bonds (BNDX, IAGG, etc.)

lazyday
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Re: Bill Sharpe's preferred portfolio

Post by lazyday » Thu Jul 13, 2017 10:04 am

25,089,806/22,271,698

is about 53/47 US/Ex-US for the equity portion.

You can verify by googling each of the fractions above.

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CyberBob
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Re: Bill Sharpe's preferred portfolio

Post by CyberBob » Thu Jul 13, 2017 10:19 am

lazyday wrote:25,089,806/22,271,698

is about 53/47 US/Ex-US for the equity portion...
Yep, right in-line with the Total World Stock Index fund (VTWSX/VT), which Sharpe would seem to prefer to use for simplicity and not having to rebalance, but doesn't, as he mentions in the video, because it's still a bit more expensive than the two separate funds. Although, the expense difference isn't too much anymore since the expense ratio of Total World Stock has been dropping steadily over the years. Using the ETF's, it would only be a difference of 7.3 basis points vs 11.

pascalwager
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Thu Jul 13, 2017 6:19 pm

CyberBob wrote:The June 30 end-of-quarter numbers are out for the indexes that Sharpe mentions in the video.
So to keep the portfolio allocations up-to-date for anyone who is interested, here are the numbers (in millions of USD):

25,089,806 - US stocks - CRSP US Total Market Index
22,271,698 - ex US stocks - FTSE Global All-Cap Index minus US
18,692,020 - US bonds - Citigroup US Broad Investment-Grade Index
17,870,770 - ex US bonds - Citigroup World Broad Investment-Grade Index minus US

So that equates to allocation percentages (rounded to the nearest whole number) of:

30% US stocks (ITOT, SCHB, THRK, VTI, etc.)
27% ex US stocks (IXUS, VXUS, etc.)
22% US bonds (AGG, BND, BNDS, SCHZ, etc.)
21% ex US bonds (BNDX, IAGG, etc.)
These were the index market values on June 30. In his RISMAT, Sharpe also shows how to adjust these values to the current day for initiating/rebalancing purposes (using the adjusted close prices from Yahoo Finance fund historical data). He simply rounds off the market values to the nearest 0.01 $Trillion.

longinvest
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Re: Bill Sharpe's preferred portfolio

Post by longinvest » Mon Aug 14, 2017 1:10 pm

Note: This is a copy of a post I made in another thread: "Bonds: Ballast for your portfolio".

I think that it is relevant to the topic of this thread.

------------
aj76er wrote:
Sun Aug 13, 2017 11:57 pm
I recently found this passage in Sharpe's RISMAT-7 to be pretty compelling:
To see this, consider a simple policy calling for a mix of 60% stocks and 40% bonds. Now assume that stocks outperform bonds so the portfolio proportions change to 65% stocks and 35% bonds. To rebalance to a 60/40 mix, one would have to sell some stock holdings and buy bonds with the proceeds. But not everyone can sell stocks and buy bonds, since for every buyer there must be a seller.
Prof. Sharpe is simplifying things a little too much. What he is saying is not exactly right. Let me explain.

What would happen, if all investors wanted to rebalance their portfolio to 60/40, is that prices would adjust accordingly; that's how markets work.

In other words, the price of stocks for which there's no buyer would drop to attract buyers and the price of bonds for which there's no seller would go up to attract sellers. This would continue until either the aggregate market prices of stocks and bonds settles to 60/40 (removing the need for anybody to rebalance), or until some investors decide to switch off 60/40 investing.

Assuming that stocks and bonds were initially fairly priced, affecting prices to match a target 60/40 allocation (in the chosen 65/35 example) would naturally increase the future returns of stocks (because their price would drop below fair value) and decrease the future returns of bonds (because their price would go up above fair value).

What is more likely to happen is for arbitrageurs to take advantage of the situation and beat the market, leading 60/40 investors to underperform the market.

In other words, the real problem Sharpe is trying to avoid, is for a passive investor to be putting excessive pressure on market prices and get taken advantage of, in the process.

Personally, I don't care. I don't think that stock markets and bond markets are so closely integrated. Money taken off the stock market does not necessarily move into the bond market; it can go elsewhere (bank account, private real estate, spent, etc.).

Also, Sharpe's Global Portfolio doesn't include all traded securities; it doesn't include things such as junk bonds and commodities, for example.

Furthermore, Sharpe's argument fails when it comes to international bonds, because he is recommending the use of funds which hedge currency. There are two problems with this. For one thing, currency hedging requires the use of derivative investments. This, in itself, causes a departure from passive indexing; it's not even clear if there's a good argument to explain how hedging counterparties would naturally be in the proper proportion so as not to cause excessive pressure on hedging costs. For a second thing, the "hedge return" will cause total returns to differ from those of the underlying markets. This will force investors willing to keep their international bond holdings in proportion of international bond markets to make transactions to rebalance their holdings (based on currency fluctuations), putting excessive pressure on market prices and opening the way for arbitrageurs to take advantage of the situation. This is actually pretty bad, as short-term currency fluctuations can be quite brutal.

Finally, Sharpe's overall proposal contains a significant departure from his Global Portfolio concept; that is, he lets investors choose the amount of TIPS they want to include in their portfolio, as if this wouldn't put excessive pressure on prices and open the way for arbitrageurs to take advantage of it. Considering TIPS as riskless is an oversimplified concept. There is simply no such thing as a riskless marketable financial security; TIPS investors who thought otherwise learned as much in 2008.

The closest thing to a riskless security is an I-Bond, which is not a tradable security, and thus, for which there is no market. Unfortunately, there are rather low annual limits to how much one can buy. (In Canada, where I live, there is nothing equivalent to I-Bonds, unfortunately).

As a result, I've decided to keep things simple:
  • I use total-market index funds to invest into four selected types of investment-grade securities: domestic stocks, international stocks, domestic nominal bonds, and domestic inflation-indexed bonds.
  • I do not include international bonds (currency-hedged or not) into my portfolio.
  • I do use a fixed target allocation (25/25/25/25) which is 50/50 stocks/bonds.
  • I rebalance my portfolio very lazily:
    • I mostly rebalance by diverting fund distributions and new portfolio contributions into assets below their target allocation. In retirement, I will take withdrawals from assets above their target allocation.
    • Infrequently, when it gets too much off target, I actively rebalance my portfolio using a rather sloppy two-step rebalancing process, which conveniently sidesteps tax problems (such as wash sales) and keeps my trades difficult to anticipate by arbitrageurs.
I know that what I'm doing is not perfect, but there is simply no perfect solution. As I've explained above, even Sharpe's proposal has significant problems.

I'm not saying that Sharpe's proposal is bad; far from it. I'm just saying that, given its own problems, it doesn't provide any foreseeable improvement over my simpler approach.

Note that I used the name Global Portfolio to refer to his recommended portfolio, in my text; Sharpe actually uses the name World Bond/Stock Portfolio, which is more accurate.
Last edited by longinvest on Wed Aug 16, 2017 12:54 am, edited 1 time in total.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

longinvest
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Re: Bill Sharpe's preferred portfolio

Post by longinvest » Tue Aug 15, 2017 6:25 am

For reference, here's a reading list related to Bill Sharpe's portfolio posted by forum member lazyday on another thread:
lazyday wrote:
Mon Aug 14, 2017 2:42 am
pascalwager" wrote:I would just let newbies read Sharpe's ebook, RISMAT, and also his adaptive asset allocation paper.
From a very quick look, I'm not sure the newbies I know would get very far. But I might try to tackle them.

RISMAT, electronic book https://web.stanford.edu/~wfsharpe/RISMAT/
Adaptive Asset Allocation Policies paper http://www.cfapubs.org/doi/pdf/10.2469/faj.v66.n3.3
W Bernstein's comment on that paper: http://www.cfapubs.org/doi/full/10.2469/faj.v66.n5.11
Sharpe's response http://www.cfapubs.org/doi/full/10.2469/faj.v66.n5.9
Old Perold&Sharpe paper that Bernstein mentions in point 4 https://web.stanford.edu/class/msande34 ... Sharpe.pdf
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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matjen
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Re: Bill Sharpe's preferred portfolio

Post by matjen » Tue Aug 15, 2017 6:53 am

These posts by Robert T. may be of interest to those looking at Sharpe's stuff.

viewtopic.php?f=10&t=221254&newpost=342 ... 0#p3419283
Using an indicative ‘market portfolio’ of:

30% US stocks
25% non-US stocks
23% US bonds
22% Non-US bonds
(re: pg 22 of Bill Sharpe’s online book http://web.stanford.edu/~wfsharpe/RISMAT/RISMAT-7.pdf)

My preferred long-term tilts are:

Equities (75% relative to 55% in ‘market portfolio’)
Value (target long-term load = 0.4)
Small (target long-term load = 0.2)
US bonds (0% non-US bonds)
Term (target long-term load = 0.5)
Default (target long-term load = 0.0)
Robert
and...

viewtopic.php?f=10&t=221254&newpost=342 ... 0#p3421592
FWIW – I had the same portfolio tilts (reflected in earlier post) over past 14.4 years.

What have these tilts added over this period relative to an indicative ‘market portfolio’ reflected in my earlier post?

+0.8% from greater equity orientation
+0.7% from greater EM allocation*
+1.0% from value and small cap tilt
+0.0% from excluding ‘default’ risk in bonds (but lowered 2008 downside & SD)
--------
+2.5% total additional annualized return

These tilts added higher risk relative to indicative ‘market portfolio’. 2008 downside = -28.7% actual vs. -20.9%

* from fixed 13% EM allocation in equities relative to MSCI ACWI which increased from about 4% to about 11% over this time period.
Another comparison with a 100% stock portfolio.

Annualized return/2008 downside: Start of 2003 to end May 2017

8.5%/-42.2% = 100% Global Stock [MSCI All Cap World Index (ACWI)]
9.6%/-28.7% = 75%:25% Global Value and Small Cap Tilted Stock:Bond [Actual]
+1.1% annualized return and lower 2008 downside

Would also note the MSCI ACWI is a raw index, while the 75%:25% stock:bond portfolio includes implementation expenses.
No plans to change tilts anytime soon. Staying the course.

Robert
A man is rich in proportion to the number of things he can afford to let alone.

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tadamsmar
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Re: Bill Sharpe's preferred portfolio

Post by tadamsmar » Tue Aug 15, 2017 7:02 am

TBillT wrote:
Mon Apr 17, 2017 2:19 pm
Interesting I have half a mind to try his approach.
Would this approach be appropriate inside an tIRA vs. rIRA?
Does it make any difference?
I think of a tIRA as just a rIRA with a haircut based on your retirement/consumption tax rate.

There might be some details to the extent that the tax rate might not be a fixed value.

lazyday
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Re: Bill Sharpe's preferred portfolio

Post by lazyday » Tue Aug 15, 2017 7:14 am

Is Sharpe's RISMAT worth the read? As a tactical asset allocator, it might be helpful to learn a bit about the passive extreme.

From the preface:
At this point in the preface to an academic book, one expects a list of friends and colleagues of
the author whose advice and comments were instrumental in the successful completion of the
work. I include no list, since no one else has read this book.
After reading much of chapter 1 and briefly looking at parts of chapter 2, I'm thinking the book may have benefited from reviews or an editor.

Any other suggestions?

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aj76er
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Re: Bill Sharpe's preferred portfolio

Post by aj76er » Tue Aug 15, 2017 7:55 pm

Here's a link to a spreadsheet that helps with rebalancing of Sharpe's World Bond/Stock (WBS) portfolio. It uses the same formulas from the Matlab program he uses in RISMAT-7. In addition, it uses googlefinance() function to auto-lookup the adj. closing prices of the funds.

viewtopic.php?f=10&t=225619&p=3491337#p3491337
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

pascalwager
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Tue Aug 15, 2017 11:46 pm

longinvest wrote:
Mon Aug 14, 2017 1:10 pm
Note: This is a copy of a post I made in another thread: "Bonds: Ballast for your portfolio".

I think that it is relevant to the topic of this thread.

------------
aj76er wrote:
Sun Aug 13, 2017 11:57 pm
I recently found this passage in Sharpe's RISMAT-7 to be pretty compelling:
To see this, consider a simple policy calling for a mix of 60% stocks and 40% bonds. Now assume that stocks outperform bonds so the portfolio proportions change to 65% stocks and 35% bonds. To rebalance to a 60/40 mix, one would have to sell some stock holdings and buy bonds with the proceeds. But not everyone can sell stocks and buy bonds, since for every buyer there must be a seller.
Prof. Sharpe is simplifying things a little too much. What he is saying is not exactly right. Let me explain.

What would happen, if all investors wanted to rebalance their portfolio to 60/40, is that prices would adjust accordingly; that's how markets work.

In other words, the price of stocks for which there's no buyer would drop to attract buyers and the price of bonds for which there's no seller would go up to attract sellers. This would continue until either the aggregate market prices of stocks and bonds settles to 60/40 (removing the need for anybody to rebalance), or until some investors decide to switch off 60/40 investing.

Assuming that stocks and bonds were initially fairly priced, affecting prices to match a target 60/40 allocation (in the chosen 65/35 example) would naturally increase the future returns of stocks (because their price would drop below fair value) and decrease the future returns of bonds (because their price would go up above fair value).

What is more likely to happen is for arbitrageurs to take advantage of the situation and beat the market, leading 60/40 investors to underperform the market.

In other words, the real problem Sharpe is trying to avoid, is for a passive investor to be putting excessive pressure on market prices and get taken advantage of, in the process.

Personally, I don't care. I don't think that stock markets and bond markets are so closely integrated. Money taken off the stock market does not necessarily move into the bond market; it can go elsewhere (bank account, private real estate, spent, etc.).

Also, Sharpe's Global Portfolio doesn't include all traded securities; it doesn't include things such as junk bonds and commodities, for example.

Furthermore, Sharpe's argument fails when it comes to international bonds, because he is recommending the use of funds which hedge currency. There are two problems with this. For one thing, currency hedging requires the use of derivative investments. This, in itself, causes a departure from passive indexing; it's not even clear if there's a good argument to explain how hedging counterparties would naturally be in the proper proportion so as not to cause excessive pressure on hedging costs. For a second thing, the "hedge return" will cause total returns to differ from those of the underlying markets. This will force investors willing to keep their international bond holdings in proportion of international bond markets to make transactions to rebalance their holdings (based on currency fluctuations), putting excessive pressure on market prices and opening the way for arbitrageurs to take advantage of the situation. This is actually pretty bad, as short-term currency fluctuations can be quite brutal.

Finally, Sharpe's overall proposal contains a significant departure from his Global Portfolio concept; that is, he lets investors choose the amount of TIPS they want to include in their portfolio, as if this wouldn't put excessive pressure on prices and open the way for arbitrageurs to take advantage of it. Considering TIPS as riskless is an oversimplified concept. There is simply no such thing as a riskless marketable financial security; TIPS investors who thought otherwise learned as much in 2008.

The closest thing to a riskless security is an I-Bond, which is not a tradable security, and thus, for which there is no market. Unfortunately, there are rather low annual limits to how much one can buy. (In Canada, where I live, there is nothing equivalent to I-Bonds, unfortunately).

As a result, I've decided to keep things simple:
  • I use total-market index funds to invest into four selected types of investment-grade securities: domestic stocks, international stocks, domestic nominal bonds, and domestic inflation-indexed bonds.
  • I do not include international bonds (currency-hedged or not) into my portfolio.
  • I do use a fixed target allocation (25/25/25/25) which is 50/50 stocks/bonds.
  • I rebalance my portfolio very lazily:
    • I mostly rebalance by diverting fund distributions and new portfolio contributions into assets below their target allocation. In retirement, I will take withdrawals from assets above their target allocation.
    • Infrequently, when it gets too much off target, I actively rebalance my portfolio using a rather sloppy two-step rebalancing process, which conveniently sidesteps tax problems (such as wash sales) and keeps my trades difficult to anticipate by arbitrageurs.
I know that what I'm doing is not perfect, but there is simply no perfect solution. As I've explained above, even Sharpe's proposal has significant problems.

I'm not saying that Sharpe's proposal is bad; far from it. I'm just saying that, given its own problems, it doesn't provide any foreseeable improvement over my simpler approach.

Note that I used the name Global Portfolio to refer to his recommended portfolio, in my text; I think that Sharpe actually uses the name Global Stock-Bond Portfolio, which is more accurate.

Sharpe uses the name: World Bond/Stock Portfolio (WBS
)

longinvest
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Re: Bill Sharpe's preferred portfolio

Post by longinvest » Wed Aug 16, 2017 12:54 am

pascalwager wrote:
Tue Aug 15, 2017 11:46 pm

Sharpe uses the name: World Bond/Stock Portfolio (WBS
)
Thanks. I've fixed the note at the end of my post accordingly.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

pascalwager
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Thu Aug 17, 2017 12:53 am

Written by longinvest:
I use total-market index funds to invest into four selected types of investment-grade securities: domestic stocks, international stocks, domestic nominal bonds, and domestic inflation-indexed bonds.
I do not include international bonds (currency-hedged or not) into my portfolio.
I do use a fixed target allocation (25/25/25/25) which is 50/50 stocks/bonds.
I rebalance my portfolio very lazily:
So, does this mean that you have 25% Canadian stocks, 25% non-Canadian stocks, and 50% Canadian bonds?

longinvest
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Re: Bill Sharpe's preferred portfolio

Post by longinvest » Thu Aug 17, 2017 7:47 am

Pascalwager,
pascalwager wrote:
Thu Aug 17, 2017 12:53 am
Written by longinvest:
I use total-market index funds to invest into four selected types of investment-grade securities: domestic stocks, international stocks, domestic nominal bonds, and domestic inflation-indexed bonds.
I do not include international bonds (currency-hedged or not) into my portfolio.
I do use a fixed target allocation (25/25/25/25) which is 50/50 stocks/bonds.
I rebalance my portfolio very lazily:
So, does this mean that you have 25% Canadian stocks, 25% non-Canadian stocks, and 50% Canadian bonds?
Yes, my portfolio is composed of 25% Canadian stocks, 25% World ex Canada stocks (unhedged), 25% Canadian nominal bonds, and 25% Canadian inflation-indexed bonds. I use four low-cost total-market index ETFs (traded on Canadian exchanges).

If I wanted to hold a world-weighted portfolio, I would need to invest 97% of my portfolio abroad, Canadian markets representing approximately 3% of world stock and bond markets.

Foreign investments are traded using foreign currencies, and their dividends are paid using foreign currencies. To buy foreign investments, my money has to go through currency-exchange markets. Reinvesting dividends means subjecting dividends to two currency conversions (given that I use domestic-based ETFs). Worse, I have to pay taxes on any profit (dividend, interest, capital gain) in my local currency. So, I really have no choice, when investing abroad, to subject my money to the vagaries of currency-exchange markets.

Foreign dividends and interest are subject to unfavorable foreign taxes, such as withholding taxes (even in tax-advantaged accounts). The risks of confiscation are higher (foreign withholding taxes are a mild form of this) and legal protection is lower (it is more difficult to seek justice abroad).

Some people hedge currency through the use of derivatives. But, derivatives come with fees. Also, in the aggregate, derivatives don't generate a return: The party and the counterparty, collectively, make no return on the derivative; they collectively pay a fee for it. For one party to make a profit, the other has to experience a loss. It's a zero-sum game before costs. Worse, the derivative is most likely to fail exactly when it is most needed, when a foreign currency drops badly.

It must be noted that currency hedging doesn't eliminate the currency conversions necessary to buy and sell foreign investments, the double conversions of reinvested foreign dividends, nor the withholding taxes on foreign dividends. Hedging derivatives are additional contracts which must be bought, hoping to find a financially-sound counterparty willing to participate. (Of course, this is all done behind the scene in a currency-hedged foreign bond ETF).

While the World Stock-Bond Portfolio is a nice theoretical construct, it ignores real practical hurdles that put domestic investors in a favorable place relative to foreign investors. In addition to the previously discussed hurdles, domestic Canadian stock dividends benefit from a favorable tax treatment (unavailable to foreign investors). I'm sure other countries have their own favorable rules for domestic investors.

In other words, the exact same investment doesn't carry the same risks, nor the same returns, when held by two investors: a domestic one and a foreign one. I think that this alone justifies discarding the idea of treating foreign investments on an equal footing with domestic investments.

As a result, there's no way that I would adopt Sharpe's World Stock-Bond Portfolio. I simply won't invest 97% of my money abroad.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

pascalwager
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Thu Aug 17, 2017 12:39 pm

longinvest wrote:
Thu Aug 17, 2017 7:47 am
Pascalwager,
pascalwager wrote:
Thu Aug 17, 2017 12:53 am
Written by longinvest:
I use total-market index funds to invest into four selected types of investment-grade securities: domestic stocks, international stocks, domestic nominal bonds, and domestic inflation-indexed bonds.
I do not include international bonds (currency-hedged or not) into my portfolio.
I do use a fixed target allocation (25/25/25/25) which is 50/50 stocks/bonds.
I rebalance my portfolio very lazily:
So, does this mean that you have 25% Canadian stocks, 25% non-Canadian stocks, and 50% Canadian bonds?
Yes, my portfolio is composed of 25% Canadian stocks, 25% World ex Canada stocks (unhedged), 25% Canadian nominal bonds, and 25% Canadian inflation-indexed bonds. I use four low-cost total-market index ETFs (traded on Canadian exchanges).

If I wanted to hold a world-weighted portfolio, I would need to invest 97% of my portfolio abroad, Canadian markets representing approximately 3% of world stock and bond markets.

Foreign investments are traded using foreign currencies, and their dividends are paid using foreign currencies. To buy foreign investments, my money has to go through currency-exchange markets. Reinvesting dividends means subjecting dividends to two currency conversions (given that I use domestic-based ETFs). Worse, I have to pay taxes on any profit (dividend, interest, capital gain) in my local currency. So, I really have no choice, when investing abroad, to subject my money to the vagaries of currency-exchange markets.

Foreign dividends and interest are subject to unfavorable foreign taxes, such as withholding taxes (even in tax-advantaged accounts). The risks of confiscation are higher (foreign withholding taxes are a mild form of this) and legal protection is lower (it is more difficult to seek justice abroad).

Some people hedge currency through the use of derivatives. But, derivatives come with fees. Also, in the aggregate, derivatives don't generate a return: The party and the counterparty, collectively, make no return on the derivative; they collectively pay a fee for it. For one party to make a profit, the other has to experience a loss. It's a zero-sum game before costs. Worse, the derivative is most likely to fail exactly when it is most needed, when a foreign currency drops badly.

It must be noted that currency hedging doesn't eliminate the currency conversions necessary to buy and sell foreign investments, the double conversions of reinvested foreign dividends, nor the withholding taxes on foreign dividends. Hedging derivatives are additional contracts which must be bought, hoping to find a financially-sound counterparty willing to participate. (Of course, this is all done behind the scene in a currency-hedged foreign bond ETF).

While the World Stock-Bond Portfolio is a nice theoretical construct, it ignores real practical hurdles that put domestic investors in a favorable place relative to foreign investors. In addition to the previously discussed hurdles, domestic Canadian stock dividends benefit from a favorable tax treatment (unavailable to foreign investors). I'm sure other countries have their own favorable rules for domestic investors.

In other words, the exact same investment doesn't carry the same risks, nor the same returns, when held by two investors: a domestic one and a foreign one. I think that this alone justifies discarding the idea of treating foreign investments on an equal footing with domestic investments.

As a result, there's no way that I would adopt Sharpe's World Stock-Bond Portfolio. I simply won't invest 97% of my money abroad.
Given your understanding of the value-degrading mechanics of international investing as expressed above--precisely what led you to invest at all overseas, let alone as much as 25% of portfolio?

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Re: Bill Sharpe's preferred portfolio

Post by longinvest » Thu Aug 17, 2017 1:38 pm

Pascalwager,
pascalwager wrote:
Thu Aug 17, 2017 12:39 pm
Given your understanding of the value-degrading mechanics of international investing as expressed above--precisely what led you to invest at all overseas, let alone as much as 25% of portfolio?
I want to get a share of the potential rewards of foreign stocks, of course!

I want to hold shares of companies such as Apple and Nestle. Despite frictions and currency fluctuations, investing into international stocks diversifies my portfolio. It's just that, as I explained, a market-cap weighting between domestic and international is not something that I would sleep well with, especially with international representing 97% of market weight.

As for international bonds, the issue is more complex. An investment into unhedged international bonds would mostly be an investment into foreign currencies, because currency fluctuations are far wider than the price volatility of bonds in their local currencies. As for currency-hedged international bonds, I've already explained that they use derivative contracts which could blow up exactly when most needed. So, I exclude international bonds from my portfolio.

Real-Return Bonds (or inflation-indexed bonds, if you prefer) are a small part of the overall Canadian bond market, something like 10%. This is not a weighting I am comfortable with. I simply don't want to expose 90% of my bond allocation to the risk of inflation. So, I've settled on an equal weighting with nominal bonds.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Re: Bill Sharpe's preferred portfolio

Post by aj76er » Thu Aug 17, 2017 5:41 pm

longinvest wrote:
Thu Aug 17, 2017 7:47 am
As a result, there's no way that I would adopt Sharpe's World Stock-Bond Portfolio. I simply won't invest 97% of my money abroad.
Another way to look at this is that 75% of your money is invested in just 3% of the global economic output. What industries and/or sectors are going to drive the majority of your future returns? Shale oil? Other commodities? Yikes.

Inflation-indexed bonds and cash should form the safe part of your non-risk portfolio. I believe this is what Sharpe advocates. So you could do something like:

75% WBS
25% Inflation indexed bonds

Furthermore, you could use Sharpe's adaptive asset allocation ideas to get more of a 75/25 default stock/bond split in your WBS.

I think some of your concerns about unhedged equity, confiscation, and legal recourse of foreign equities are a little overblown. At any rate, I think it's important to back up claims like that with real data and probability of occurrence.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Bill Sharpe's preferred portfolio

Post by longinvest » Thu Aug 17, 2017 7:52 pm

aj76er,
aj76er wrote:
Thu Aug 17, 2017 5:41 pm
longinvest wrote:
Thu Aug 17, 2017 7:47 am
As a result, there's no way that I would adopt Sharpe's World Stock-Bond Portfolio. I simply won't invest 97% of my money abroad.
Another way to look at this is that 75% of your money is invested in just 3% of the global economic output. What industries and/or sectors are going to drive the majority of your future returns? Shale oil? Other commodities? Yikes.
What can I say? Our market is what it is. I work and live in Canada; when commodities do badly, it also hurts Canada's economy. So, if I don't do well because of that part of my portfolio, there will most likely be other people around me not doing well either. I won't be alone in pain. :wink:
aj76er wrote:
Thu Aug 17, 2017 5:41 pm
Inflation-indexed bonds and cash should form the safe part of your non-risk portfolio. I believe this is what Sharpe advocates. So you could do something like:

75% WBS
25% Inflation indexed bonds

Furthermore, you could use Sharpe's adaptive asset allocation ideas to get more of a 75/25 default stock/bond split in your WBS.
Wouldn't a 16,566.7% overweight* ** to Canadian Real-Return Bonds be in conflict with the concept of cap-weighting? :wink: (It's a joke).

* I am assuming that world bonds are 50% of the WBS portfolio, that Canadian bonds are 3% of that, and that Real-Return Bonds are 10% of that: 50% X 3% X 10% = 0.15%.
** The overweight is calculated as follows: (25% / 0.15%) - 1 = 16,566.7%.

aj76er wrote:
Thu Aug 17, 2017 5:41 pm
I think some of your concerns about unhedged equity, confiscation, and legal recourse of foreign equities are a little overblown. At any rate, I think it's important to back up claims like that with real data and probability of occurrence.
I didn't claim that any of the most serious risks were likely; only that they were possible.

I was trying to explain that risks and returns were not the same for domestic and international investors. When a security is both riskier and less-rewarding to me than to somebody else, why should I invest as much into it as that other person?

Like others, on our forums, I have found a portfolio that allows me to sleep well at night. I really don't think that it is perfect. But I consider it good-enough for me.

Our world is complex. I have made peace with the idea that there is no such thing as a perfect portfolio; not even Sharpe's WBS portfolio.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Re: Bill Sharpe's preferred portfolio

Post by aj76er » Thu Aug 17, 2017 8:44 pm

longinvest wrote:
Thu Aug 17, 2017 7:52 pm
aj76er wrote:
Thu Aug 17, 2017 5:41 pm
Inflation-indexed bonds and cash should form the safe part of your non-risk portfolio. I believe this is what Sharpe advocates. So you could do something like:

75% WBS
25% Inflation indexed bonds

Furthermore, you could use Sharpe's adaptive asset allocation ideas to get more of a 75/25 default stock/bond split in your WBS.
Wouldn't a 16,566.7% overweight* ** to Canadian Real-Return Bonds be in conflict with the concept of cap-weighting? :wink: (It's a joke).
I know only meant as a joke; but just to clarify, the non-risk portfolio that Sharpe advocates has nothing to do with cap-weighting. It is only the risk portfolio (e.g. the WBS) that tracks global cap-weighting. The WBS is certainly risky and has a lot of the risks you mention embedded in it (even if probability of some of those are small). As with any portfolio of stocks+bonds, I think a healthy does of TIPS, cash, and I-bonds are a good thing to maintain, which it seems like you have :).
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Wed Sep 27, 2017 1:11 am

Sharpe doesn't believe in factor premiums, but does seem to approve of one tilt. He calls it the yield tilt. It's based on differential taxation and uses a high-yield index fund in tax-sheltered accounts and a high capital gains index fund in a taxable account. This would be used to tilt away from the market portfolio.

He covers this in RISMAT Chapter 21: Advice.

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Re: Bill Sharpe's preferred portfolio

Post by Valuethinker » Wed Sep 27, 2017 6:56 am

longinvest wrote:
Thu Aug 17, 2017 7:52 pm
aj76er,
aj76er wrote:
Thu Aug 17, 2017 5:41 pm
longinvest wrote:
Thu Aug 17, 2017 7:47 am
As a result, there's no way that I would adopt Sharpe's World Stock-Bond Portfolio. I simply won't invest 97% of my money abroad.
Another way to look at this is that 75% of your money is invested in just 3% of the global economic output. What industries and/or sectors are going to drive the majority of your future returns? Shale oil? Other commodities? Yikes.
What can I say? Our market is what it is. I work and live in Canada; when commodities do badly, it also hurts Canada's economy. So, if I don't do well because of that part of my portfolio, there will most likely be other people around me not doing well either. I won't be alone in pain. :wink:
Sorry came to this discussion late-- not sure if the discussants are still around?

40% of the Canadian index is financials. The Big 5 (6?) banks are an awfully big chunk of the market.

The macroeconomic risk to Canada is not resource prices. If you happen to live in Alta Sask BC more so than the rest of the country, but agricultural commodities are not on the same pricing cycle as oil and gas. Oil prices aren't likely to stick below $50 for long periods, although of course in the short run no one knows (but they are moving up at the moment).

The macroeconomic risk is in housing prices. After all, housing prices never go down, right? ;-). The stock market risk is also in housing prices and the Canadian consumer debt problem, generally. Canada is in a position that would have dignified Ireland or Iceland in 2006. Maybe the outcome won't be so bad. Maybe.

My own sense is that when it hits the fan the CAD could go down to 50 cents USD. Coupled with renegotiation of NAFTA (after oil and gas, autos and autoparts are both Canada's largest import and largest export, I believe) things could get pretty unpleasant. Ontario and BC in particular but there will be spillovers to the rest of the country.

longinvest
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Re: Bill Sharpe's preferred portfolio

Post by longinvest » Wed Sep 27, 2017 8:41 am

Valuethinker,
Valuethinker wrote:
Wed Sep 27, 2017 6:56 am
longinvest wrote:
Thu Aug 17, 2017 7:52 pm
aj76er,
aj76er wrote:
Thu Aug 17, 2017 5:41 pm
longinvest wrote:
Thu Aug 17, 2017 7:47 am
As a result, there's no way that I would adopt Sharpe's World Stock-Bond Portfolio. I simply won't invest 97% of my money abroad.
Another way to look at this is that 75% of your money is invested in just 3% of the global economic output. What industries and/or sectors are going to drive the majority of your future returns? Shale oil? Other commodities? Yikes.
What can I say? Our market is what it is. I work and live in Canada; when commodities do badly, it also hurts Canada's economy. So, if I don't do well because of that part of my portfolio, there will most likely be other people around me not doing well either. I won't be alone in pain. :wink:
Sorry came to this discussion late-- not sure if the discussants are still around?

40% of the Canadian index is financials. The Big 5 (6?) banks are an awfully big chunk of the market.

The macroeconomic risk to Canada is not resource prices. If you happen to live in Alta Sask BC more so than the rest of the country, but agricultural commodities are not on the same pricing cycle as oil and gas. Oil prices aren't likely to stick below $50 for long periods, although of course in the short run no one knows (but they are moving up at the moment).

The macroeconomic risk is in housing prices. After all, housing prices never go down, right? ;-). The stock market risk is also in housing prices and the Canadian consumer debt problem, generally. Canada is in a position that would have dignified Ireland or Iceland in 2006. Maybe the outcome won't be so bad. Maybe.

My own sense is that when it hits the fan the CAD could go down to 50 cents USD. Coupled with renegotiation of NAFTA (after oil and gas, autos and autoparts are both Canada's largest import and largest export, I believe) things could get pretty unpleasant. Ontario and BC in particular but there will be spillovers to the rest of the country.
I'll accept market returns, whatever they happen to be.

I have provided ample justifications for not investing 97% of my money abroad (which would be market cap for international stocks and bonds, as I am Canadian). In particular, I have repeatedly explained, on this thread, that risks and returns are not the same for domestic and international investors. When a security is both riskier and less-rewarding to me than to somebody else, I see no rational justification to invest as much into it as that other person. Is there something wrong in this argument?

For context: my portfolio is composed of 25% domestic stocks, 25% international stocks (without currency hedging), 25% domestic nominal bonds, and 25% domestic inflation-indexed bonds. Each of the four components are indexed to cap-weighted total markets.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Posts: 33958
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Re: Bill Sharpe's preferred portfolio

Post by Valuethinker » Wed Sep 27, 2017 1:29 pm

longinvest wrote:
Wed Sep 27, 2017 8:41 am
Valuethinker,
Valuethinker wrote:
Wed Sep 27, 2017 6:56 am
longinvest wrote:
Thu Aug 17, 2017 7:52 pm
aj76er,
aj76er wrote:
Thu Aug 17, 2017 5:41 pm
longinvest wrote:
Thu Aug 17, 2017 7:47 am
As a result, there's no way that I would adopt Sharpe's World Stock-Bond Portfolio. I simply won't invest 97% of my money abroad.
Another way to look at this is that 75% of your money is invested in just 3% of the global economic output. What industries and/or sectors are going to drive the majority of your future returns? Shale oil? Other commodities? Yikes.
What can I say? Our market is what it is. I work and live in Canada; when commodities do badly, it also hurts Canada's economy. So, if I don't do well because of that part of my portfolio, there will most likely be other people around me not doing well either. I won't be alone in pain. :wink:
Sorry came to this discussion late-- not sure if the discussants are still around?

40% of the Canadian index is financials. The Big 5 (6?) banks are an awfully big chunk of the market.

The macroeconomic risk to Canada is not resource prices. If you happen to live in Alta Sask BC more so than the rest of the country, but agricultural commodities are not on the same pricing cycle as oil and gas. Oil prices aren't likely to stick below $50 for long periods, although of course in the short run no one knows (but they are moving up at the moment).

The macroeconomic risk is in housing prices. After all, housing prices never go down, right? ;-). The stock market risk is also in housing prices and the Canadian consumer debt problem, generally. Canada is in a position that would have dignified Ireland or Iceland in 2006. Maybe the outcome won't be so bad. Maybe.

My own sense is that when it hits the fan the CAD could go down to 50 cents USD. Coupled with renegotiation of NAFTA (after oil and gas, autos and autoparts are both Canada's largest import and largest export, I believe) things could get pretty unpleasant. Ontario and BC in particular but there will be spillovers to the rest of the country.
I'll accept market returns, whatever they happen to be.

I have provided ample justifications for not investing 97% of my money abroad (which would be market cap for international stocks and bonds, as I am Canadian). In particular, I have repeatedly explained, on this thread, that risks and returns are not the same for domestic and international investors. When a security is both riskier and less-rewarding to me than to somebody else, I see no rational justification to invest as much into it as that other person. Is there something wrong in this argument?

For context: my portfolio is composed of 25% domestic stocks, 25% international stocks (without currency hedging), 25% domestic nominal bonds, and 25% domestic inflation-indexed bonds. Each of the four components are indexed to cap-weighted total markets.
Thank you for the explanation. An alternative would be to globally weight stocks, but hedge back into CAD. In fact, until they changed the RRSP rules (about 2000?) you *had* to do that.

https://www.blackrock.com/ca/individual ... -index-etf

40% of your CDN equity holdings are Canadian financials. The Big 6 banks are about 30%. Put it another way, if you have $100k in Canadian stocks, you have $8k in RBC and $8k in TD Bank-- each about 2% of a portfolio of $400k. (The UK index has similar skews, but not so much towards banks).

The portfolio sensitivity is not really towards natural resources, particularly now that the oil price has come down so far. The sensitivity is to banks.

I globally weight (on stocks). UK is about 8% of world markets, from memory. I am probably double that (16%) although the UK FTSE index is heavily diversified internationally in any case -- the gains from international diversification are smaller for UK investors.

Bonds I pretty much hold sterling bonds. The Canadian RRBs (the 2026 issue) are a historic legacy.

longinvest
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Re: Bill Sharpe's preferred portfolio

Post by longinvest » Thu Sep 28, 2017 8:29 am

Valuethinker,
Valuethinker wrote:
Wed Sep 27, 2017 1:29 pm
longinvest wrote:
Wed Sep 27, 2017 8:41 am
Valuethinker,
Valuethinker wrote:
Wed Sep 27, 2017 6:56 am
longinvest wrote:
Thu Aug 17, 2017 7:52 pm
aj76er,
aj76er wrote:
Thu Aug 17, 2017 5:41 pm


Another way to look at this is that 75% of your money is invested in just 3% of the global economic output. What industries and/or sectors are going to drive the majority of your future returns? Shale oil? Other commodities? Yikes.
What can I say? Our market is what it is. I work and live in Canada; when commodities do badly, it also hurts Canada's economy. So, if I don't do well because of that part of my portfolio, there will most likely be other people around me not doing well either. I won't be alone in pain. :wink:
Sorry came to this discussion late-- not sure if the discussants are still around?

40% of the Canadian index is financials. The Big 5 (6?) banks are an awfully big chunk of the market.

The macroeconomic risk to Canada is not resource prices. If you happen to live in Alta Sask BC more so than the rest of the country, but agricultural commodities are not on the same pricing cycle as oil and gas. Oil prices aren't likely to stick below $50 for long periods, although of course in the short run no one knows (but they are moving up at the moment).

The macroeconomic risk is in housing prices. After all, housing prices never go down, right? ;-). The stock market risk is also in housing prices and the Canadian consumer debt problem, generally. Canada is in a position that would have dignified Ireland or Iceland in 2006. Maybe the outcome won't be so bad. Maybe.

My own sense is that when it hits the fan the CAD could go down to 50 cents USD. Coupled with renegotiation of NAFTA (after oil and gas, autos and autoparts are both Canada's largest import and largest export, I believe) things could get pretty unpleasant. Ontario and BC in particular but there will be spillovers to the rest of the country.
I'll accept market returns, whatever they happen to be.

I have provided ample justifications for not investing 97% of my money abroad (which would be market cap for international stocks and bonds, as I am Canadian). In particular, I have repeatedly explained, on this thread, that risks and returns are not the same for domestic and international investors. When a security is both riskier and less-rewarding to me than to somebody else, I see no rational justification to invest as much into it as that other person. Is there something wrong in this argument?

For context: my portfolio is composed of 25% domestic stocks, 25% international stocks (without currency hedging), 25% domestic nominal bonds, and 25% domestic inflation-indexed bonds. Each of the four components are indexed to cap-weighted total markets.
Thank you for the explanation. An alternative would be to globally weight stocks, but hedge back into CAD. In fact, until they changed the RRSP rules (about 2000?) you *had* to do that.
Currency hedging is actually one of the weaknesses of Sharpe's proposal. I've explained that earlier in this thread:
longinvest wrote:
Thu Aug 17, 2017 7:47 am
...
Foreign investments are traded using foreign currencies, and their dividends are paid using foreign currencies. To buy foreign investments, my money has to go through currency-exchange markets. Reinvesting dividends means subjecting dividends to two currency conversions (given that I use domestic-based ETFs). Worse, I have to pay taxes on any profit (dividend, interest, capital gain) in my local currency. So, I really have no choice, when investing abroad, to subject my money to the vagaries of currency-exchange markets.

Foreign dividends and interest are subject to unfavorable foreign taxes, such as withholding taxes (even in tax-advantaged accounts). The risks of confiscation are higher (foreign withholding taxes are a mild form of this) and legal protection is lower (it is more difficult to seek justice abroad).

Some people hedge currency through the use of derivatives. But, derivatives come with fees. Also, in the aggregate, derivatives don't generate a return: The party and the counterparty, collectively, make no return on the derivative; they collectively pay a fee for it. For one party to make a profit, the other has to experience a loss. It's a zero-sum game before costs. Worse, the derivative is most likely to fail exactly when it is most needed, when a foreign currency drops badly.

It must be noted that currency hedging doesn't eliminate the currency conversions necessary to buy and sell foreign investments, the double conversions of reinvested foreign dividends, nor the withholding taxes on foreign dividends. Hedging derivatives are additional contracts which must be bought, hoping to find a financially-sound counterparty willing to participate. (Of course, this is all done behind the scene in a currency-hedged foreign bond ETF).


While the World Stock-Bond Portfolio is a nice theoretical construct, it ignores real practical hurdles that put domestic investors in a favorable place relative to foreign investors. In addition to the previously discussed hurdles, domestic Canadian stock dividends benefit from a favorable tax treatment (unavailable to foreign investors). I'm sure other countries have their own favorable rules for domestic investors.

In other words, the exact same investment doesn't carry the same risks, nor the same returns, when held by two investors: a domestic one and a foreign one. I think that this alone justifies discarding the idea of treating foreign investments on an equal footing with domestic investments.
...
I've highlighted in red, above, my criticism of currency hedging, but I've kept the context in black to avoid introducing ambiguities.
Valuethinker wrote:
Wed Sep 27, 2017 1:29 pm
https://www.blackrock.com/ca/individual ... -index-etf

40% of your CDN equity holdings are Canadian financials. The Big 6 banks are about 30%. Put it another way, if you have $100k in Canadian stocks, you have $8k in RBC and $8k in TD Bank-- each about 2% of a portfolio of $400k. (The UK index has similar skews, but not so much towards banks).
I'm fully aware of my domestic market composition. But, it is what it is. I'll accept whatever my domestic cap-weighted total-market index ETF will deliver in returns in that 25% part of my portfolio.
Valuethinker wrote:
Wed Sep 27, 2017 1:29 pm
The portfolio sensitivity is not really towards natural resources, particularly now that the oil price has come down so far. The sensitivity is to banks.

I globally weight (on stocks). UK is about 8% of world markets, from memory. I am probably double that (16%) although the UK FTSE index is heavily diversified internationally in any case -- the gains from international diversification are smaller for UK investors.

Bonds I pretty much hold sterling bonds. The Canadian RRBs (the 2026 issue) are a historic legacy.
This is off topic, but what's so special about the 2026 issue?
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Re: Bill Sharpe's preferred portfolio

Post by Valuethinker » Thu Sep 28, 2017 9:16 am

longinvest wrote:
Thu Sep 28, 2017 8:29 am

I'm fully aware of my domestic market composition. But, it is what it is. I'll accept whatever my domestic cap-weighted total-market index ETF will deliver in returns in that 25% part of my portfolio.
Valuethinker wrote:
Wed Sep 27, 2017 1:29 pm
The portfolio sensitivity is not really towards natural resources, particularly now that the oil price has come down so far. The sensitivity is to banks.

I globally weight (on stocks). UK is about 8% of world markets, from memory. I am probably double that (16%) although the UK FTSE index is heavily diversified internationally in any case -- the gains from international diversification are smaller for UK investors.

Bonds I pretty much hold sterling bonds. The Canadian RRBs (the 2026 issue) are a historic legacy.
This is off topic, but what's so special about the 2026 issue?
Thank you for all the elucidation which was interesting. I was in particular probing your comment about Canada's economy, stock market and natural resources prices. The Chinese commodity bubble is over, that's not where the risk lies in the Canadian economy right now (even for Alberta in that the oil price seems to have stabilized, as much as we can ever say that about oil). CNQ (Canadian Natural Resources) is not in a great place at $50/bl oil, but they still make money.

I agree that foreign currency hedging is not without cost. For an American investor it's not worth it (as long as the fixed income is held in US securities) on the equity side. For a UK investor it is marginal (the FTSE 100 makes between 60-70% of its profits on non sterling activities and so offers a degree of natural hedging-- most notably in the last 12 months when sterling dropped as much as 15% against EUR & USD due to Brexit vote). For a Canadian investor, there is a natural hedge in many companies via exporting activities or the external activities of Canadian companies (usually in the USA). However the sectoral diversification in the home market is very low (same for Australians).

When I bought bonds for a Canadian RRSP, the 2026 ones appeared to be a reasonable yield-- this would have been something like 16 years ago, from memory.

http://www.globeinvestor.com/servlet/Pa ... gov&page=1

0 per cent real yield now, according to this.

Of course, the straight long Canada would have been a better investment, in retrospect ;-). I don't remember, but it was probably yielding 650 bips, then :? :? :(

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Re: Bill Sharpe's preferred portfolio

Post by longinvest » Thu Sep 28, 2017 10:17 am

Valuethinker,
Valuethinker wrote:
Thu Sep 28, 2017 9:16 am
Thank you for all the elucidation which was interesting. I was in particular probing your comment about Canada's economy, stock market and natural resources prices. The Chinese commodity bubble is over, that's not where the risk lies in the Canadian economy right now (even for Alberta in that the oil price seems to have stabilized, as much as we can ever say that about oil). CNQ (Canadian Natural Resources) is not in a great place at $50/bl oil, but they still make money.
I used the Oil example because risk has actually shown up in the recent past. From August 2014 to January 2016, the Canadian stock market lost -13% while international (ex-Canada) stocks gained +12%. (Portfolio Visualizer backtest). This happened to be a difficult time for many workers in the Oil industry and had a significant negative impact on the finances of provinces such as Alberta.
Valuethinker wrote:
Thu Sep 28, 2017 9:16 am
I agree that foreign currency hedging is not without cost. For an American investor it's not worth it (as long as the fixed income is held in US securities) on the equity side. For a UK investor it is marginal (the FTSE 100 makes between 60-70% of its profits on non sterling activities and so offers a degree of natural hedging-- most notably in the last 12 months when sterling dropped as much as 15% against EUR & USD due to Brexit vote). For a Canadian investor, there is a natural hedge in many companies via exporting activities or the external activities of Canadian companies (usually in the USA). However the sectoral diversification in the home market is very low (same for Australians).
Very few domestic stock markets (if any) are as diversified as the US stock market. I've provided arguments justifying a home bias. Yet, I still invest a significant part of my portfolio abroad, just not 97% as would be dictated by world market weights.
Valuethinker wrote:
Thu Sep 28, 2017 9:16 am
When I bought bonds for a Canadian RRSP, the 2026 ones appeared to be a reasonable yield-- this would have been something like 16 years ago, from memory.

http://www.globeinvestor.com/servlet/Pa ... gov&page=1

0 per cent real yield now, according to this.

Of course, the straight long Canada would have been a better investment, in retrospect ;-). I don't remember, but it was probably yielding 650 bips, then :? :? :(
In the period 1992-2016, the total nominal bond market (5.0% real CAGR) and total inflation-indexed bond market (5.2% real CAGR) have had pretty similar returns. Long nominal bonds, though, had impressive returns (6.8% real CAGR), slightly beating the domestic stock market (6.7% real CAGR) over the same period (source: The Stingy Investor Asset Mixer).

One would have needed a good crystal ball in 1992, though, to predict that. :oops:

Anyway, I'm too young for all this. In 1992, I didn't have a portfolio; I was accumulating student debts. I now have to invest in a low real-yield world. :?
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Re: Bill Sharpe's preferred portfolio

Post by Valuethinker » Thu Sep 28, 2017 11:43 am

longinvest wrote:
Thu Sep 28, 2017 10:17 am

In the period 1992-2016, the total nominal bond market (5.0% real CAGR) and total inflation-indexed bond market (5.2% real CAGR) have had pretty similar returns. Long nominal bonds, though, had impressive returns (6.8% real CAGR), slightly beating the domestic stock market (6.7% real CAGR) over the same period (source: The Stingy Investor Asset Mixer).

One would have needed a good crystal ball in 1992, though, to predict that. :oops:

Anyway, I'm too young for all this. In 1992, I didn't have a portfolio; I was accumulating student debts. I now have to invest in a low real-yield world. :?
But would you rather be my age (55 ish) and have invested at those times, or your age now? ;-). What you want is to have 1992 investment opportunities but not to have been in your early 30s then? The thing you can't have back is the elapsed time ;-).

I did in fact buy one of the first ETFs ever created - Toronto Index Participation Shares which tracked the Toronto 35. I don't remember if it was in 1990 but it was in the early 1990s. I remember the broker from Wood Gundy explaining it to me. The TSE (at the time) had a problem with certain large cap shares that had limited liquidity-- the Bronfman group of companies (was Brascan now Brookfield in a changed form) and that made the creation tricky

https://en.wikipedia.org/wiki/Exchange- ... nd#History

https://www.blackrock.com/ca/individual ... rough=true

Blackrock says it was the first ETF; wikipedia says there was an earlier one.

We do indeed live in a very low yield world. I am not particularly bullish on asset returns going forward. We either stay in the current state, in which case all signs are that they will be lousy OR we have some kind of bear market (associated with higher interest rates?) that puts valuations into more reasonable states.

Since in the end pension assets are annuitized, the growth in asset value has been largely offset by the fall in the income they will produce. At least since 2000.*

* I realize it depends which country and how, but the underlying premise is that assets eventually get converted into spending money, i.e. income. A point which is usually missed in discussions of portfolios.

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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Fri Sep 29, 2017 2:58 pm

Sharpe mentions that the WBS portfolio is designed for a world without differential taxation, and modifications might be appropriate based on the affects of taxation on asset allocation and location.

Allocation:

-high-yield versus low-yield stocks
-bonds versus stocks ratio

Location:

-hold municipal bonds instead of total market bonds in taxable account
-hold low-yield stocks in taxable and high-yield in tax-deferred

But some of this requires specialized advisor software, not yet written, and even Sharpe isn't eager to take on the challenge.

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Re: Bill Sharpe's preferred portfolio

Post by aj76er » Sat Sep 30, 2017 4:38 pm

Just an FYI, I've started a wiki entry for Sharpe's WBS portfolio here: https://www.bogleheads.org/wiki/World_B ... _Portfolio

Feel free to make additions, updates, and/or corrections!

I've probably added all I care to do for the time being :)
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Sat Sep 30, 2017 5:08 pm

aj76er wrote:
Sat Sep 30, 2017 4:38 pm
Just an FYI, I've started a wiki entry for Sharpe's WBS portfolio here: https://www.bogleheads.org/wiki/World_B ... _Portfolio

Feel free to make additions, updates, and/or corrections!

I've probably added all I care to do for the time being :)
I just now looked at it. Great job!

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Re: Bill Sharpe's preferred portfolio

Post by CyberBob » Fri Oct 20, 2017 12:40 pm

The September 30, end-of-quarter numbers are out. The total market-caps all went up, but the overall allocation percentages are still the same at 30/27/22/21. September 30 numbers in red. I'll update the wiki too when I get a minute.
CyberBob wrote:
Thu Jul 13, 2017 9:03 am
The June 30 end-of-quarter numbers are out for the indexes that Sharpe mentions in the video.
So to keep the portfolio allocations up-to-date for anyone who is interested, here are the numbers (in millions of USD):

25,089,806 25,999,436 - US stocks - CRSP US Total Market Index
22,271,698 23,711,345 - ex US stocks - FTSE Global All-Cap Index minus US
18,692,020 18,988,480 - US bonds - Citigroup US Broad Investment-Grade Index
17,870,770 18,500,880 - ex US bonds - Citigroup World Broad Investment-Grade Index minus US

So that equates to allocation percentages (rounded to the nearest whole number) of:

30% 30% US stocks (ITOT, SCHB, THRK, VTI, etc.)
27% 27% ex US stocks (IXUS, VXUS, etc.)
22% 22% US bonds (AGG, BND, BNDS, SCHZ, etc.)
21% 21% ex US bonds (BNDX, IAGG, etc.)

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Re: Bill Sharpe's preferred portfolio

Post by tadamsmar » Sat Oct 21, 2017 11:23 am

Sharp advocates an AA that has 2 parts. One part is a global cap-weighted stock-bond portfolio and the other part is TIPS. You increase your TIPS allocation to reduce risk. That is, more TIPS as you age.

But the typical Boglehead approach is to increase bonds to reduce risk. That is, more bonds as you age.

The Sharpe model is in a colorful plot with the title "Far simpler, and based only on a rudimentary model of equilibrium. But not likely to generate 25 basis points in advisory fees."

https://web.stanford.edu/~wfsharpe/RISMAT/RISMAT-7.pdf

One issue is that the highest risk AA is not all that risky.

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Re: Bill Sharpe's preferred portfolio

Post by aj76er » Sun Oct 22, 2017 5:21 pm

CyberBob wrote:
Fri Oct 20, 2017 12:40 pm
The September 30, end-of-quarter numbers are out. The total market-caps all went up, but the overall allocation percentages are still the same at 30/27/22/21. September 30 numbers in red. I'll update the wiki too when I get a minute.
CyberBob wrote:
Thu Jul 13, 2017 9:03 am
The June 30 end-of-quarter numbers are out for the indexes that Sharpe mentions in the video.
So to keep the portfolio allocations up-to-date for anyone who is interested, here are the numbers (in millions of USD):

25,089,806 25,999,436 - US stocks - CRSP US Total Market Index
22,271,698 23,711,345 - ex US stocks - FTSE Global All-Cap Index minus US
18,692,020 18,988,480 - US bonds - Citigroup US Broad Investment-Grade Index
17,870,770 18,500,880 - ex US bonds - Citigroup World Broad Investment-Grade Index minus US

So that equates to allocation percentages (rounded to the nearest whole number) of:

30% 30% US stocks (ITOT, SCHB, THRK, VTI, etc.)
27% 27% ex US stocks (IXUS, VXUS, etc.)
22% 22% US bonds (AGG, BND, BNDS, SCHZ, etc.)
21% 21% ex US bonds (BNDX, IAGG, etc.)
It would be great to update the Wiki with new the new numbers (if you have the time). For exUS, I think I'm still using "FTSE All-World ex US Index" that Sharpe used in RISMAT, which doesn't include intl small cap.

Also, if you'd like to include references to the fact sheets then I think the wiki page will be ready to publish. The citation that is needed is under the rebalancing section (denoted with "Citation Needed").
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Bill Sharpe's preferred portfolio

Post by CyberBob » Wed Jan 31, 2018 10:16 am

The December 2017 end-of-year numbers are out for the indexes that Sharpe mentions in the video.
So to keep the portfolio allocations up-to-date for anyone who is interested, here are the numbers (in millions of USD):

27,452,976 - US stocks - CRSP US Total Market Index
25,022,106 - ex US stocks - FTSE Global All-Cap Index minus US
19,202,380 - US bonds - Citigroup US Broad Investment-Grade Index
18,795,670 - ex US bonds - Citigroup World Broad Investment-Grade Index minus US

So that equates to allocation percentages (rounded to the nearest whole number) of:

30% US stocks (ITOT, SCHB, SPTM, VTI, etc.)
28% ex US stocks (IXUS, VXUS, ACIM, etc.)
21% US bonds (AGG, BND, SPAB, SCHZ, etc.)
21% ex US bonds (BNDX, IAGG, etc.)

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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Wed Jan 31, 2018 12:14 pm

CyberBob wrote:
Wed Jan 31, 2018 10:16 am
The December 2017 end-of-year numbers are out for the indexes that Sharpe mentions in the video.
So to keep the portfolio allocations up-to-date for anyone who is interested, here are the numbers (in millions of USD):

27,452,976 - US stocks - CRSP US Total Market Index
25,022,106 - ex US stocks - FTSE Global All-Cap Index minus US
19,202,380 - US bonds - Citigroup US Broad Investment-Grade Index
18,795,670 - ex US bonds - Citigroup World Broad Investment-Grade Index minus US

So that equates to allocation percentages (rounded to the nearest whole number) of:

30% US stocks (ITOT, SCHB, SPTM, VTI, etc.)
28% ex US stocks (IXUS, VXUS, ACIM, etc.)
21% US bonds (AGG, BND, SPAB, SCHZ, etc.)
21% ex US bonds (BNDX, IAGG, etc.)
My spreadsheet recalculates everyday.

As of yesterday:

31.2% US stocks
28.5% non-US stocks
20.4% US bonds
19.8% non-US bonds

Over the last seven months, the portfolio moved from 57/43 to 60/40, stocks/bonds

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Re: Bill Sharpe's preferred portfolio

Post by Fclevz » Wed Jan 31, 2018 12:32 pm

pascalwager wrote:
Wed Jan 31, 2018 12:14 pm
Over the last seven months, the portfolio moved from 57/43 to 60/40, stocks/bonds
Interesting that it has hovered around the traditional 60/40 balanced allocation.

As for your spreadsheet, are you using Sharpe’s method for calculating between index data releases? Is a copy of that spreadsheet available?

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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Wed Jan 31, 2018 2:57 pm

Yes, Sharpe made a similar remark in RISMAT 2 1/2 years ago when the World Bond/Stock Portfolio (WBS) was at 55/45.

My spreadsheet is set up to use Sharpe's method quarterly, but the above proportion's are from my actual portfolio after rebalancing two weeks ago. They're probably very close and even after three months time I've hesitated before deciding to buy/sell to rebalance.

The WBS reflects the global average investor, but can also be used as a core investment to meet individual investor requirements.

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Re: Bill Sharpe's preferred portfolio

Post by aj76er » Wed Jan 31, 2018 3:53 pm

pascalwager wrote:
Wed Jan 31, 2018 12:14 pm
CyberBob wrote:
Wed Jan 31, 2018 10:16 am
The December 2017 end-of-year numbers are out for the indexes that Sharpe mentions in the video.
So to keep the portfolio allocations up-to-date for anyone who is interested, here are the numbers (in millions of USD):

27,452,976 - US stocks - CRSP US Total Market Index
25,022,106 - ex US stocks - FTSE Global All-Cap Index minus US
19,202,380 - US bonds - Citigroup US Broad Investment-Grade Index
18,795,670 - ex US bonds - Citigroup World Broad Investment-Grade Index minus US

So that equates to allocation percentages (rounded to the nearest whole number) of:

30% US stocks (ITOT, SCHB, SPTM, VTI, etc.)
28% ex US stocks (IXUS, VXUS, ACIM, etc.)
21% US bonds (AGG, BND, SPAB, SCHZ, etc.)
21% ex US bonds (BNDX, IAGG, etc.)
My spreadsheet recalculates everyday.

As of yesterday:

31.2% US stocks
28.5% non-US stocks
20.4% US bonds
19.8% non-US bonds

Over the last seven months, the portfolio moved from 57/43 to 60/40, stocks/bonds
Yes, but you still need (or should) manually update your spreadsheet with the quarterly mktcap numbers from the factsheets.

Thanks cyberbob for continuing to post these numbers.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Bill Sharpe's preferred portfolio

Post by herpfinance » Wed Jan 31, 2018 4:00 pm

rj49 wrote:
Tue Jan 17, 2017 11:30 pm
Apart from his investments, Sharpe had interesting ideas years ago on how to allocate retirement funds, in 'lockboxes', a combination of a total market risk portfolio combined with a risk-free asset to be spent in each year of retirement. He said it's the optimal way to draw down funds and maximize growth and spending value, while protecting against cognitive decline that could result in unwise investment decisions later in life. If you google his academic page, or his name and 'lockbox', he has some interesting papers and presentations on the theory, although he was light on specifics on how to set up such investments.
Now you've sparked my interest. I'll have to satisfy my curiosity by checking those papers out.
"The intelligent investor is a realist who sells to optimists and buys from pessimists" - Benjamin Graham

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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Wed Jan 31, 2018 8:14 pm

aj76er wrote:
Wed Jan 31, 2018 3:53 pm
pascalwager wrote:
Wed Jan 31, 2018 12:14 pm
CyberBob wrote:
Wed Jan 31, 2018 10:16 am
The December 2017 end-of-year numbers are out for the indexes that Sharpe mentions in the video.
So to keep the portfolio allocations up-to-date for anyone who is interested, here are the numbers (in millions of USD):

27,452,976 - US stocks - CRSP US Total Market Index
25,022,106 - ex US stocks - FTSE Global All-Cap Index minus US
19,202,380 - US bonds - Citigroup US Broad Investment-Grade Index
18,795,670 - ex US bonds - Citigroup World Broad Investment-Grade Index minus US

So that equates to allocation percentages (rounded to the nearest whole number) of:

30% US stocks (ITOT, SCHB, SPTM, VTI, etc.)
28% ex US stocks (IXUS, VXUS, ACIM, etc.)
21% US bonds (AGG, BND, SPAB, SCHZ, etc.)
21% ex US bonds (BNDX, IAGG, etc.)
My spreadsheet recalculates everyday.

As of yesterday:

31.2% US stocks
28.5% non-US stocks
20.4% US bonds
19.8% non-US bonds

Over the last seven months, the portfolio moved from 57/43 to 60/40, stocks/bonds
Yes, but you still need (or should) manually update your spreadsheet with the quarterly mktcap numbers from the factsheets.

Thanks cyberbob for continuing to post these numbers.
Yes, you need to look up the index market values every quarter, and it does no good to bookmark the fact sheets as the next quarter's fact sheet addresses change. Then you enter them onto your spreadsheet along with the two fund adjusted closing prices (end-of-quarter and current) and observe the error (between your present AA and the newly calculated AA).

If the error is acceptable, you may decide to skip doing any Vanguard exchanges for that quarter. You'll notice that Bob's AA entries are rounded, but Sharpe carries the AA percentages out to two decimal points. So I think Sharpe leans toward precision and always doing the quarterly exchanges.

Note: This is no task for someone in cognitive decline and that's probably why Sharpe is frustrated about Vanguard not providing a WBS fund.

The WBS is intended to be paired with TIPS, which might vary between 0 and 100% depending on the investor.

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Re: Bill Sharpe's preferred portfolio

Post by aj76er » Wed Jan 31, 2018 10:21 pm

pascalwager wrote:
Wed Jan 31, 2018 8:14 pm
aj76er wrote:
Wed Jan 31, 2018 3:53 pm
pascalwager wrote:
Wed Jan 31, 2018 12:14 pm
CyberBob wrote:
Wed Jan 31, 2018 10:16 am
The December 2017 end-of-year numbers are out for the indexes that Sharpe mentions in the video.
So to keep the portfolio allocations up-to-date for anyone who is interested, here are the numbers (in millions of USD):

27,452,976 - US stocks - CRSP US Total Market Index
25,022,106 - ex US stocks - FTSE Global All-Cap Index minus US
19,202,380 - US bonds - Citigroup US Broad Investment-Grade Index
18,795,670 - ex US bonds - Citigroup World Broad Investment-Grade Index minus US

So that equates to allocation percentages (rounded to the nearest whole number) of:

30% US stocks (ITOT, SCHB, SPTM, VTI, etc.)
28% ex US stocks (IXUS, VXUS, ACIM, etc.)
21% US bonds (AGG, BND, SPAB, SCHZ, etc.)
21% ex US bonds (BNDX, IAGG, etc.)
My spreadsheet recalculates everyday.

As of yesterday:

31.2% US stocks
28.5% non-US stocks
20.4% US bonds
19.8% non-US bonds

Over the last seven months, the portfolio moved from 57/43 to 60/40, stocks/bonds
Yes, but you still need (or should) manually update your spreadsheet with the quarterly mktcap numbers from the factsheets.

Thanks cyberbob for continuing to post these numbers.
Yes, you need to look up the index market values every quarter, and it does no good to bookmark the fact sheets as the next quarter's fact sheet addresses change. Then you enter them onto your spreadsheet along with the two fund adjusted closing prices (end-of-quarter and current) and observe the error (between your present AA and the newly calculated AA).

If the error is acceptable, you may decide to skip doing any Vanguard exchanges for that quarter. You'll notice that Bob's AA entries are rounded, but Sharpe carries the AA percentages out to two decimal points. So I think Sharpe leans toward precision and always doing the quarterly exchanges.

Note: This is no task for someone in cognitive decline and that's probably why Sharpe is frustrated about Vanguard not providing a WBS fund.

The WBS is intended to be paired with TIPS, which might vary between 0 and 100% depending on the investor.
I also dislike having to lookup fact sheets to determine mktcap. It is error prone and moderately time consuming for a passive strategy. And you bring up a good point about the issue of cognitive decline late in life. I'm actually surprised that Vanguard has not at least created a total world bond fund (i.e. the bond equivalent of VT).
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Bill Sharpe's preferred portfolio

Post by CyberBob » Thu Feb 01, 2018 10:16 am

pascalwager wrote:
Wed Jan 31, 2018 8:14 pm
You'll notice that Bob's AA entries are rounded, but Sharpe carries the AA percentages out to two decimal points. So I think Sharpe leans toward precision and always doing the quarterly exchanges.
Yeah, I'll have to stop rounding, because you're absolutely right about Sharpe's precision. In fact, in the video, he mentions doing a rebalance in his own portfolio of one-third of one percent (0.33%).

So in the spirit of Sharpe's more exactness, the 2017 end-of-year numbers look like:

30.34% US stocks
27.66% ex-US stocks
21.22% US bonds
20.77% ex-US bonds

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Re: Bill Sharpe's preferred portfolio

Post by Valuethinker » Thu Feb 01, 2018 12:03 pm

CyberBob wrote:
Thu Feb 01, 2018 10:16 am
pascalwager wrote:
Wed Jan 31, 2018 8:14 pm
You'll notice that Bob's AA entries are rounded, but Sharpe carries the AA percentages out to two decimal points. So I think Sharpe leans toward precision and always doing the quarterly exchanges.
Yeah, I'll have to stop rounding, because you're absolutely right about Sharpe's precision. In fact, in the video, he mentions doing a rebalance in his own portfolio of one-third of one percent (0.33%).

So in the spirit of Sharpe's more exactness, the 2017 end-of-year numbers look like:

30.34% US stocks
27.66% ex-US stocks
21.22% US bonds
20.77% ex-US bonds
I wonder if it is just coincidence that these proportions are 50/50 US/ foreign equities and US/ foreign bonds, and 59% stocks, 41% bonds?

Other than a slight underweighting of the USA, those numbers seem so remarkably like a 60/40 portfolio with equity fully diversified globally?

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Re: Bill Sharpe's preferred portfolio

Post by Lastrun » Thu Feb 01, 2018 3:11 pm

Valuethinker wrote:
Thu Feb 01, 2018 12:03 pm
Other than a slight underweighting of the USA, those numbers seem so remarkably like a 60/40 portfolio with equity fully diversified globally?
Somewhere, a BH mentioned that perhaps it would just be easier to have an equal percentage portfolio. I thought it was in this thread but I cannot find it.

For kicks take a look at this:
https://www.portfoliovisualizer.com/bac ... ged2=20.77

Not much of a difference and the equally weighted actually had less risk.

Of course, I realize this is flawed as the market weight is static.

Hopeful that someday Vanguard has something available on this. It would be simple, good for the market portfolio purists, and VG could charge some extra bps for the rebalancing that most would be willing to pay for.

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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Thu Feb 01, 2018 7:44 pm

Valuethinker wrote:
Thu Feb 01, 2018 12:03 pm
CyberBob wrote:
Thu Feb 01, 2018 10:16 am
pascalwager wrote:
Wed Jan 31, 2018 8:14 pm
You'll notice that Bob's AA entries are rounded, but Sharpe carries the AA percentages out to two decimal points. So I think Sharpe leans toward precision and always doing the quarterly exchanges.
Yeah, I'll have to stop rounding, because you're absolutely right about Sharpe's precision. In fact, in the video, he mentions doing a rebalance in his own portfolio of one-third of one percent (0.33%).

So in the spirit of Sharpe's more exactness, the 2017 end-of-year numbers look like:

30.34% US stocks
27.66% ex-US stocks
21.22% US bonds
20.77% ex-US bonds
I wonder if it is just coincidence that these proportions are 50/50 US/ foreign equities and US/ foreign bonds, and 59% stocks, 41% bonds?

Other than a slight underweighting of the USA, those numbers seem so remarkably like a 60/40 portfolio with equity fully diversified globally?
Yes, 60/40 is pure coincidence. The portfolio proportions are determined by the individual market values of four indexes, so the stock/bond ratio is not fixed. In August 2015, for example, the ratio was 55/45.

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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Fri Feb 02, 2018 3:47 pm

Lastrun wrote:
Thu Feb 01, 2018 3:11 pm
Valuethinker wrote:
Thu Feb 01, 2018 12:03 pm
Other than a slight underweighting of the USA, those numbers seem so remarkably like a 60/40 portfolio with equity fully diversified globally?
Somewhere, a BH mentioned that perhaps it would just be easier to have an equal percentage portfolio. I thought it was in this thread but I cannot find it.

For kicks take a look at this:
https://www.portfoliovisualizer.com/bac ... ged2=20.77

Not much of a difference and the equally weighted actually had less risk.

Of course, I realize this is flawed as the market weight is static.

Hopeful that someday Vanguard has something available on this. It would be simple, good for the market portfolio purists, and VG could charge some extra bps for the rebalancing that most would be willing to pay for.
Yes, anyone could use it as their core investment, surely suitable by itself for the average global investor. Then, since most of us aren't the average global investor, we could tilt away from it by adding the VG Total World Stock Fund, or the VG Total World Bond Market Fund (possible future product), or other funds with a solid rationale for inclusion.

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Re: Bill Sharpe's preferred portfolio

Post by Valuethinker » Sat Feb 03, 2018 9:37 am

Lastrun wrote:
Thu Feb 01, 2018 3:11 pm
Valuethinker wrote:
Thu Feb 01, 2018 12:03 pm
Other than a slight underweighting of the USA, those numbers seem so remarkably like a 60/40 portfolio with equity fully diversified globally?
Somewhere, a BH mentioned that perhaps it would just be easier to have an equal percentage portfolio. I thought it was in this thread but I cannot find it.

For kicks take a look at this:
https://www.portfoliovisualizer.com/bac ... ged2=20.77

Not much of a difference and the equally weighted actually had less risk.

Of course, I realize this is flawed as the market weight is static.

Hopeful that someday Vanguard has something available on this. It would be simple, good for the market portfolio purists, and VG could charge some extra bps for the rebalancing that most would be willing to pay for.
I think it's a really important point that it doesn't matter much (50% v. 60% equities) HOWEVER

- the time scale (1999-present) includes an incredible bull market in bonds, and until the last couple of years, stocks had more or less done nothing (on a total return basis better than that)

Thank you for that, and I'd have to run it over various sub periods to see how it balanced out.

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