submit ?s for Bill Sharpe

[Jon Luskin]

Yours truly will be honored to interview for a future podcast episode Bill Sharpe.

Sharpe's work contributed to the capital asset pricing model (CAPM), earning him the 1990 Nobel Memorial Prize in Economic Sciences. The Sharpe ratio - a favorite of finance nerds - measures the risk-adjusted return of an investment.

You can submit your questions below. (I may include your question in the episode. No guarantees.)

This will *not* be a live episode (Twitter Space). So, the only way to get questions is by submitting them below.

On a personal note, I used the Sharpe ratio to show how index funds outperformed high-fee portfolios for my thesis on endowment investing. So, I am very excited about this interview!

Thank you,

Jon Luskin
Host
Bogleheads® Live

P.S. Listen to past episodes of Bogleheads® Live via the podcast: https://boglecenter.net/category/bogleheads-live/

The Bogleheads® Live series is hosted by me, Jon Luskin, CFP®, a long-time Boglehead®. This podcast is supported by the John C. Bogle Center for Financial Literacy, a non-profit organization approved by the IRS as a 501(c)(3) public charity on February 6, 2012.

[SB1234]

I have some landmines for him. Would be curious about his take.

Q1. Are buy and hold index fund investors free riding in the sense that they do not contribute in price discovery.

Q2. If vanguard funds own all companies then is it really capitalism.

Q3. If investors sell shares to generate income then aren't they losing their ownership in companies. Isn't that a reason for dividend investing.

[kd2008]

Warren Buffett and others are proponents of share buybacks as tax efficient way of increasing share holder returns vs dividends. (Deriding opposers as financially illiterate)

Simply from layman's observation, it is nowhere close to effective use of surplus capital.

Already there is 1% excise tax on share buybacks. Nothing's says it won't go higher in the future.

Why is market not punishing such shortsightedness?

In other words, if market is pricing only future cash flows and not effective use of capital for future cash flows, then is it even an efficient market?

[retired@50]

Warren Buffett and others are proponents of share buybacks as tax efficient way of increasing share holder returns vs dividends. (Deriding opposers as financially illiterate)

Simply from layman's observation, it is nowhere close to effective use of surplus capital.

Already there is 1% excise tax on share buybacks. Nothing's says it won't go higher in the future.

Why is market not punishing such shortsightedness?

In other words, if market is pricing only future cash flows and not effective use of capital for future cash flows, then is it even an efficient market?

You might enjoy this recent article about buybacks from Jason Zweig.
https://www.wsj.com/articles/stock-buyb ... _permalink

Regards,

[nisiprius]

In your RISMAT papers, you have suggested a portfolio that could be realized with four Vanguard index funds: Total [US] Stock Market Index, Total International Stock Index, Total [US] Bond Market, and Total International Bond Index [currency-hedged].

You just include the traditional securities, stocks and bonds. How do you feel about the idea of trying to match the global portfolio of everything that has a market, i.e including not only stocks and bonds, but also real estate, gold, commodities, fine art, cryptocurrency, etc?

[nisiprius]

It personally makes me queasy that as far as I know, all of the academic giants that have forged the widely-held views of financial economics are personally involved with profit-making enterprises: Jeremy Siegel and WisdomTree; Eugene Fama and Robert C. Merton with Dimensional Fund Advisors; Harry Markowitz with multiple advisory firms; Burton Malkiel with first Vanguard and then Wealthfront; and you with Financial Engines.

Should investors be concerned about funding bias and conflict of interest? If not, why not?

[er999]

Now that tips have positive real yields should individual investors who have enough tax deferred space be using them exclusively instead of nominal treasuries?

Do you agree with the idea that fixed income should be for safety and exclusively in treasuries? If not, what types of fixed income do you recommend?

Relates to the above question, Do high yield or emerging market bonds have a role in a portfolio or are we better off just increasing equity percentage?

Are public REITs (like vanguard’s VNQ) still a good asset class to invest in? They were highly recommended 10-20 years ago by Burton Malkiel and David Swenson. I’ve read mixed things about them recently no longer recommending them as an asset class and instead using an allocation to small cap value instead of to REITs.

[kd2008]

Warren Buffett and others are proponents of share buybacks as tax efficient way of increasing share holder returns vs dividends. (Deriding opposers as financially illiterate)

Simply from layman's observation, it is nowhere close to effective use of surplus capital.

Already there is 1% excise tax on share buybacks. Nothing's says it won't go higher in the future.

Why is market not punishing such shortsightedness?

In other words, if market is pricing only future cash flows and not effective use of capital for future cash flows, then is it even an efficient market?

You might enjoy this recent article about buybacks from Jason Zweig.
https://www.wsj.com/articles/stock-buyb ... _permalink

Regards,

Thank you for the article. LOL. Seems buybacks make no difference. The bad examples of capital use are from 70s. There are way better discovery tools for M&A activities today. Nobody has a beyond-a-reasonable doubt answer to buyback voodoo. So in essence they are indeed a bad use of capital if they are not definitely good.

[watchnerd]

How do you feel about the idea of trying to match the global portfolio of everything that has a market, i.e including not only stocks and bonds, but also real estate, gold, commodities, fine art, cryptocurrency, etc?

+1 to this question

I would add "securitized gold, commodities, etc."

(as that's sort of what I try to do)

[afan]

1. Can you discuss the role of annuities vs bonds in retirement planning?

2. Can you comment on whether factor tilting improves risk-adjusted returns, or merely exposes the investor to greater risks in return for higher returns, with no improvement in risk-adjusted results?

3. On the same topic, can you discuss whether there is a unique efficient portfolio when investors have heterogeneous risk preferences? If not, how can investors learn their personal utility functions to guide their choice of portfolio risks?

[McQ]

As Nisiprius mentioned, a Sharpe portfolio could be implemented with just four funds, or really just two, World stock and World bond, per a long-running thread here. Under MPT, that is THE market portfolio, and there can be no more efficient, no more diversified portfolio (if those are all the assets that be).

But Taylor chose to go with a 3-fund portfolio, excluding world bonds; and Bill Bernstein has likewise expressed reservations about international bonds. Vanguard, by contrast, goes with Sharpe.

One argument against foreign bonds is tail risk—1919-1923 and all that. More generally, that foreign government bonds are not risk free in the way that domestic government bonds are. The local sovereign can always issue currency to redeem its bonds at par at maturity; a foreign government can’t necessarily do that for the US dollar investor.

And then there is foreign exchange risk, which, if there is a cost to hedge, may wipe out any diversification benefit.

So the question for Professor Sharpe is, How much more should an ordinary US investor expect from a World Stock – World bond portfolio, relative to holding Taylor’s 3-fund portfolio, in which all the bond weight is placed on domestic total bond?

No one knows exactly, of course; but I would be interested to hear his expectation for the scale of the benefit.

-an extra 10 basis points in return enhancement / risk reduction from including World bonds?
-25 bp? 50 bp? More?

Or—no expectation, just an allegiance to theory: that in the very long run, the whole must be better than any part, even if only by a basis point or two.

[Grt2bOutdoors]

1) What is your opinion on the use of various asset classes such as Small Cap Value to tilt away from the broad markets in the thought one is able to capture excess returns even with long periods of underperformance in those asset classes?

Thank you.

[abuss368]

What are his thoughts on private real estate investing such as Fundrise and Grant Cardone as an alternative asset class to include with a well diversified and low cost total market index fund portfolio?

These options are typically higher fees of 1.00% or more and illiquid. Do they increase the probability of achieving Alpha?

Best.
Tony

[abuss368]

What are his thoughts on the portfolio Jack Brennan discusses in his interviews and updated book “Straight Talk on Investing”?

This portfolio appears to be low cost and diversified total market stock and bond funds with high dividend funds as a compliment to increase yield and provide income.

Also Jack Brennan does not appear to be a fan of sector funds such as real estate.

Best.
Tony

[9-5 Suited]

Should investors consider volatility to be the primary measure of risk when constructing financial portfolios?

[Jon Luskin]

I have some landmines for him. Would be curious about his take.

Q1. Are buy and hold index fund investors free riding in the sense that they do not contribute in price discovery.

Q2. If vanguard funds own all companies then is it really capitalism.

Q3. If investors sell shares to generate income then aren't they losing their ownership in companies. Isn't that a reason for dividend investing.

Thank you!

I'll add these to the list.

[burritoLover]

Is chasing higher yields via lower duration bonds in the current environment a viable strategy?

[alluringreality]

John Bogle often recommended buy and hold investing. It might be reasonable to describe the Adaptive Asset Allocation Policies link from Mr. Sharpe's website as a buy and hold style of investment strategy. Does he have any thoughts around why contrarian, or constant-mix, strategy or products are often recommended for retail investors? Part of my agreement with John Bogle was in relation to his comments around buy and hold investing, so I'd be interested in any thoughts Mr. Sharpe might have on the subject.
https://web.stanford.edu/~wfsharpe/aaap/index.html

As an example of typical recommendations, the Bogleheads Investment Philosophy includes five references to rebalancing. The webpage suggests the approach "will help you to stay the course." Personally I'm not convinced sticking closely to a contrarian strategy will necessarily help me through challenging times, and some in-the-moment forum discussion from times like 2008 reads in a similar fashion. My own reasoning comes from personal employment considerations, and I get the impression that constant-mix rebalancing may likewise not necessarily address some concerns from other retail investors during recessionary stock market periods. While I have a few ideas why recommending contrarian strategy may be generally reasonable, behaviorally I'm simply more inclined to choose a buy and hold approach for challenging events. Would he happen to have any current thoughts about asset allocation strategy?
https://www.bogleheads.org/wiki/Boglehe ... philosophy

[exodusing]

He has recommended using a global cap-weighted portfolio, plus TIPS to adjust for risk tolerance. He would let the share of each component vary as the market moved, rather than rebalancing to a fixed allocation. A long thread is at viewtopic.php?t=207804

Has he changed his views?

Given the relative scarcity of TIPS, it is not the case that everyone can follow this plan. Any thoughts on that?

A general principle is that people who are much different from the average investor (weighted by portfolio size or trading activity, not the average person) should deviate from cap-weighting to take into account their differences. Does he agree and how would he apply that, including the difficulty in determining how one differs from average?

[Jon Luskin]

Warren Buffett and others are proponents of share buybacks as tax efficient way of increasing share holder returns vs dividends. (Deriding opposers as financially illiterate)

Simply from layman's observation, it is nowhere close to effective use of surplus capital.

Already there is 1% excise tax on share buybacks. Nothing's says it won't go higher in the future.

Why is market not punishing such shortsightedness?

In other words, if market is pricing only future cash flows and not effective use of capital for future cash flows, then is it even an efficient market?

Thanks for the question. It's going on the list!

[Jon Luskin]

You might enjoy this recent article about buybacks from Jason Zweig.
https://www.wsj.com/articles/stock-buyb ... _permalink

Regards,

Thanks for sharing!

[retired@50]

You might enjoy this recent article about buybacks from Jason Zweig.
https://www.wsj.com/articles/stock-buyb ... _permalink

Regards,

Thanks for sharing!

You're welcome Jon.

I don't know if Bill Sharpe will have an opinion about buybacks, but I think Jason Zweig's position that they are neither "good" or "bad" is on target. Jason says they are a tool, just like a hammer. You can either build a house with a hammer, or tear down a house with a hammer. It depends on how buybacks are being used.

Regards,

[Jon Luskin]

You're welcome Jon.

I don't know if Bill Sharpe will have an opinion about buybacks, but I think Jason Zweig's position that they are neither "good" or "bad" is on target. Jason says they are a tool, just like a hammer. You can either build a house with a hammer, or tear down a house with a hammer. It depends on how buybacks are being used.

Regards,

Great summary!

[Jon Luskin]

In your RISMAT papers, you have suggested a portfolio that could be realized with four Vanguard index funds: Total [US] Stock Market Index, Total International Stock Index, Total [US] Bond Market, and Total International Bond Index [currency-hedged].

You just include the traditional securities, stocks and bonds. How do you feel about the idea of trying to match the global portfolio of everything that has a market, i.e including not only stocks and bonds, but also real estate, gold, commodities, fine art, cryptocurrency, etc?

Great question!

It's going on the list.

[White Coat Investor]

Risk adjusted return calculations such as the Sharpe Ratio use volatility as a proxy for risk. Yet a long term investor really shouldn't care much about volatility. Does that mean they should not care about Sharpe, Treynor, or Sortino ratios?

How can one adjust returns for the deep risks discussed by Dr. Bernstein (Inflation, deflation, confiscation, devastation?) i.e. the permanent loss of capital.

[McQ]

Jon, if you haven't seen it, the book "In Pursuit of the Perfect Portfolio," 2021 by Andrew W. Lo and Stephen R. Foerster, https://www.google.com/books/edition/In ... =en&gbpv=0 has a chapter based on an interview with Sharpe, might be food for thought.

I recommend the book to any BH who wants to know more about the story/history of Modern Portfolio Theory: who did what, who knew whom, who was whose student, and in general, the people behind the theory. In addition to Sharpe, there are chapters on Markowitz, Fama, John Bogle, Scholes, Merton, Leibowitz, Shiller, Ellis and Siegel.

[Charles Joseph]

Can you eat risk-adjusted returns?

[Jon Luskin]

It personally makes me queasy that as far as I know, all of the academic giants that have forged the widely-held views of financial economics are personally involved with profit-making enterprises: Jeremy Siegel and WisdomTree; Eugene Fama and Robert C. Merton with Dimensional Fund Advisors; Harry Markowitz with multiple advisory firms; Burton Malkiel with first Vanguard and then Wealthfront; and you with Financial Engines.

Should investors be concerned about funding bias and conflict of interest? If not, why not?

Love it!

It's going on the list.

Thank you,
Jon

[Jon Luskin]

Now that tips have positive real yields should individual investors who have enough tax deferred space be using them exclusively instead of nominal treasuries?

Do you agree with the idea that fixed income should be for safety and exclusively in treasuries? If not, what types of fixed income do you recommend?

Relates to the above question, Do high yield or emerging market bonds have a role in a portfolio or are we better off just increasing equity percentage?

Are public REITs (like vanguard’s VNQ) still a good asset class to invest in? They were highly recommended 10-20 years ago by Burton Malkiel and David Swenson. I’ve read mixed things about them recently no longer recommending them as an asset class and instead using an allocation to small cap value instead of to REITs.

Thanks! Your question is going on the list.

[Jon Luskin]

1. Can you discuss the role of annuities vs bonds in retirement planning?

2. Can you comment on whether factor tilting improves risk-adjusted returns, or merely exposes the investor to greater risks in return for higher returns, with no improvement in risk-adjusted results?

3. On the same topic, can you discuss whether there is a unique efficient portfolio when investors have heterogeneous risk preferences? If not, how can investors learn their personal utility functions to guide their choice of portfolio risks?

They're going on the list.

[afan]

Jon, if you haven't seen it, the book "In Pursuit of the Perfect Portfolio," 2021 by Andrew W. Lo and Stephen R. Foerster, https://www.google.com/books/edition/In ... =en&gbpv=0 has a chapter based on an interview with Sharpe, might be food for thought.

I recommend the book to any BH who wants to know more about the story/history of Modern Portfolio Theory: who did what, who knew whom, who was whose student, and in general, the people behind the theory. In addition to Sharpe, there are chapters on Markowitz, Fama, John Bogle, Scholes, Merton, Leibowitz, Shiller, Ellis and Siegel.

The interviews on which the book is based were recorded and one can find them online.

[Jon Luskin]

As Nisiprius mentioned, a Sharpe portfolio could be implemented with just four funds, or really just two, World stock and World bond, per a long-running thread here. Under MPT, that is THE market portfolio, and there can be no more efficient, no more diversified portfolio (if those are all the assets that be).

But Taylor chose to go with a 3-fund portfolio, excluding world bonds; and Bill Bernstein has likewise expressed reservations about international bonds. Vanguard, by contrast, goes with Sharpe.

One argument against foreign bonds is tail risk—1919-1923 and all that. More generally, that foreign government bonds are not risk free in the way that domestic government bonds are. The local sovereign can always issue currency to redeem its bonds at par at maturity; a foreign government can’t necessarily do that for the US dollar investor.

And then there is foreign exchange risk, which, if there is a cost to hedge, may wipe out any diversification benefit.

So the question for Professor Sharpe is, How much more should an ordinary US investor expect from a World Stock – World bond portfolio, relative to holding Taylor’s 3-fund portfolio, in which all the bond weight is placed on domestic total bond?

No one knows exactly, of course; but I would be interested to hear his expectation for the scale of the benefit.

-an extra 10 basis points in return enhancement / risk reduction from including World bonds?
-25 bp? 50 bp? More?

Or—no expectation, just an allegiance to theory: that in the very long run, the whole must be better than any part, even if only by a basis point or two.

Thanks for an interesting question. It's going on the list.

[Jon Luskin]

1) What is your opinion on the use of various asset classes such as Small Cap Value to tilt away from the broad markets in the thought one is able to capture excess returns even with long periods of underperformance in those asset classes?

Thank you.

Thanks for your question.

I'll add it to the list.

[djm2001]

How does Professor Sharpe think of the World Bond/Stock portfolio in relation to average consumption? Does the payout stream (dividends and buybacks) from this portfolio fund the average consumption stream? What withdrawal strategy does he believe works best with the World Bond/Stock portfolio (fixed percentage vs. 1/N vs. live off the dividends (and buybacks) etc.) for the average investor?

[Jon Luskin]

What are his thoughts on private real estate investing such as Fundrise and Grant Cardone as an alternative asset class to include with a well diversified and low cost total market index fund portfolio?

These options are typically higher fees of 1.00% or more and illiquid. Do they increase the probability of achieving Alpha?

Best.
Tony

I like this question!

It's going on the list.

[Jon Luskin]

What are his thoughts on the portfolio Jack Brennan discusses in his interviews and updated book “Straight Talk on Investing”?

This portfolio appears to be low cost and diversified total market stock and bond funds with high dividend funds as a compliment to increase yield and provide income.

Also Jack Brennan does not appear to be a fan of sector funds such as real estate.

Best.
Tony

Thanks, Tony.

I'll see if Bill has any thoughts on income investing.

Best,
Jon

[Jon Luskin]

Should investors consider volatility to be the primary measure of risk when constructing financial portfolios?

Great question!

It's going on the list.

[abuss368]

What are his thoughts on the portfolio Jack Brennan discusses in his interviews and updated book “Straight Talk on Investing”?

This portfolio appears to be low cost and diversified total market stock and bond funds with high dividend funds as a compliment to increase yield and provide income.

Also Jack Brennan does not appear to be a fan of sector funds such as real estate.

Best.
Tony

Thanks, Tony.

I'll see if Bill has any thoughts on income investing.

Best,
Jon

Hi Jon -

Excellent. As you know real estate funds and crowdfunding are the rage the last few years. Alternative investments more accessible today. Perhaps a long period of low yield and income prompted some of these discussions.

Interested in thoughts.

Best.
Tony

[Jon Luskin]

Is chasing higher yields via lower duration bonds in the current environment a viable strategy?

Ooh! A bond question.

It's going on the list.

[burritoLover]

Looking forward to this episode!

[Jon Luskin]

John Bogle often recommended buy and hold investing. It might be reasonable to describe the Adaptive Asset Allocation Policies link from Mr. Sharpe's website as a buy and hold style of investment strategy. Does he have any thoughts around why contrarian, or constant-mix, strategy or products are often recommended for retail investors? Part of my agreement with John Bogle was in relation to his comments around buy and hold investing, so I'd be interested in any thoughts Mr. Sharpe might have on the subject.
https://web.stanford.edu/~wfsharpe/aaap/index.html

As an example of typical recommendations, the Bogleheads Investment Philosophy includes five references to rebalancing. The webpage suggests the approach "will help you to stay the course." Personally I'm not convinced sticking closely to a contrarian strategy will necessarily help me through challenging times, and some in-the-moment forum discussion from times like 2008 reads in a similar fashion. My own reasoning comes from personal employment considerations, and I get the impression that constant-mix rebalancing may likewise not necessarily address some concerns from other retail investors during recessionary stock market periods. While I have a few ideas why recommending contrarian strategy may be generally reasonable, behaviorally I'm simply more inclined to choose a buy and hold approach for challenging events. Would he happen to have any current thoughts about asset allocation strategy?
https://www.bogleheads.org/wiki/Boglehe ... philosophy

Thanks!

I'll add to the list.

Best,
Jon

[Jon Luskin]

He has recommended using a global cap-weighted portfolio, plus TIPS to adjust for risk tolerance. He would let the share of each component vary as the market moved, rather than rebalancing to a fixed allocation. A long thread is at viewtopic.php?t=207804

Has he changed his views?

Given the relative scarcity of TIPS, it is not the case that everyone can follow this plan. Any thoughts on that?

A general principle is that people who are much different from the average investor (weighted by portfolio size or trading activity, not the average person) should deviate from cap-weighting to take into account their differences. Does he agree and how would he apply that, including the difficulty in determining how one differs from average?

Good questions!

It's going on the list.

[Jon Luskin]

Risk adjusted return calculations such as the Sharpe Ratio use volatility as a proxy for risk. Yet a long term investor really shouldn't care much about volatility. Does that mean they should not care about Sharpe, Treynor, or Sortino ratios?

How can one adjust returns for the deep risks discussed by Dr. Bernstein (Inflation, deflation, confiscation, devastation?) i.e. the permanent loss of capital.

Great questions!

Onto the list they go.

[Jon Luskin]

Jon, if you haven't seen it, the book "In Pursuit of the Perfect Portfolio," 2021 by Andrew W. Lo and Stephen R. Foerster, https://www.google.com/books/edition/In ... =en&gbpv=0 has a chapter based on an interview with Sharpe, might be food for thought.

I recommend the book to any BH who wants to know more about the story/history of Modern Portfolio Theory: who did what, who knew whom, who was whose student, and in general, the people behind the theory. In addition to Sharpe, there are chapters on Markowitz, Fama, John Bogle, Scholes, Merton, Leibowitz, Shiller, Ellis and Siegel.

Thanks for the recommendation!

I'm currently reading "How to Pay for College: A complete financial plan for funding your child's education" by Ann Garcia.

Ann will be our next guest on the live Twitter series - with that next episode being on Thursday at 12 pm Pacific / 3 pm Eastern.

I've got another thread going for folks who want to get questions about college planning answered:

https://bogleheads.org/forum/viewtopic.php?p=7185605

Best,
Jon

[kd2008]

Any estimate when we may get to listen to this episode?

[kd2008]

Warren Buffett and others are proponents of share buybacks as tax efficient way of increasing share holder returns vs dividends. (Deriding opposers as financially illiterate)

Simply from layman's observation, it is nowhere close to effective use of surplus capital.

Already there is 1% excise tax on share buybacks. Nothing's says it won't go higher in the future.

Why is market not punishing such shortsightedness?

In other words, if market is pricing only future cash flows and not effective use of capital for future cash flows, then is it even an efficient market?

Thanks for the question. It's going on the list!

Thank you so much!

[Jon Luskin]

Can you eat risk-adjusted returns?

Tell me more about this question.

[Jon Luskin]

The interviews on which the book is based were recorded and one can find them online.

Link?

[Charles Joseph]

Can you eat risk-adjusted returns?

Tell me more about this question.

1. It was a tad snarky and not worthy of the work you do and the service you provide!

2. I guess what I was getting is that a high Sharpe Ratio may be meaningless if returns are too low for an investor to meet their goals. Would it be better for the overwhelming majority of investors to simply focus on risk tolerance (using, for example, Rick Ferri's “asset allocation stress test”, or any other useful risk tolerance tool) and then build a simple two- or three-fund portfolio that meets a person's risk tolerance, while ignoring Sharpe Ratio all together?

[Jon Luskin]

How does Professor Sharpe think of the World Bond/Stock portfolio in relation to average consumption? Does the payout stream (dividends and buybacks) from this portfolio fund the average consumption stream? What withdrawal strategy does he believe works best with the World Bond/Stock portfolio (fixed percentage vs. 1/N vs. live off the dividends (and buybacks) etc.) for the average investor?

Tell me more about this question.