[Are] Bogleheads Tilters and Timers[?]

[betablocker]

Seems like we take great pride in not timing the market and accepting what it gives by not tilting in favor of certain asset classes but most Bogleheads hold a disproportionate % or 100% US equities, don’t hold global bonds, and have timed the market by not holding much in the way of real assets and in particular commodities.

That bet has worked out for 40 years no doubt but it is tilting and timing. If you hold a 60/40 of US stocks and treasuries, you’re under diversified or over exposed to US market risk and inflation. Again, that’s been a good bet but it’s a bet not “holding the market portfolio.” Cullen Roche has done some good writing on this.

[Title edited by admin Alex]

[ScubaHogg]

Holding market cap weighted bonds is much less compelling than equities. Depending on your situation, literally a single bond issue might be all you need (ie, all your bond allocations might be in a single year group of US treasuries). Simply adding more doesn’t accomplish the same things it does with equities

[betablocker]

No doubt there are reasons to do it but it is tilting away from a global market portfolio. My post is an effort to get Bogleheads to recognize their own biases.

[Harmanic]

It is impossible to be totally passive. You must make a decision to weight factors. Even choosing VT is an active decision. The fundamental premise behind John Bogle's philosophy is "low costs" and "stay the course." The best way to do that is to have an IPS and stick to it. A Boglehead can even have actively managed funds if they fit the bill of low costs and low turnover.

[Fallible]

Seems like we take great pride in not timing the market and accepting what it gives by not tilting in favor of certain asset classes but most Bogleheads hold a disproportionate % or 100% US equities, don’t hold global bonds, and have timed the market by not holding much in the way of real assets and in particular commodities.

That bet has worked out for 40 years no doubt but it is tilting and timing. If you hold a 60/40 of US stocks and treasuries, you’re under diversified or over exposed to US market risk and inflation. Again, that’s been a good bet but it’s a bet not “holding the market portfolio.” Cullen Roche has done some good writing on this.

What are your sources for the above that I've boldfaced?

[Da5id]

Seems like we take great pride in not timing the market and accepting what it gives by not tilting in favor of certain asset classes but most Bogleheads hold a disproportionate % or 100% US equities, don’t hold global bonds, and have timed the market by not holding much in the way of real assets and in particular commodities.

That bet has worked out for 40 years no doubt but it is tilting and timing. If you hold a 60/40 of US stocks and treasuries, you’re under diversified or over exposed to US market risk and inflation. Again, that’s been a good bet but it’s a bet not “holding the market portfolio.” Cullen Roche has done some good writing on this.

Tilting sure.

But if someone who picks a constant allocation and holds to it is "market timing" than the phrase is pretty meaningless to me. I think market timing as most of us understand requires active moves based on judgements about the future of the market and dynamic shifting among asset classes. So selling your stocks to go to cash because you think the market is overpriced. Or switching between asset classes because of predictions about the future. I think my definition is rather more standard than yours, see e.g. https://www.investopedia.com/terms/m/markettiming.asp

[nisiprius]

Sticks 'n' stones c'n break my bones but names can never hurt me.

[toddthebod]

"You're a market timer because you're don't invest in commodities!"

That doesn't even make sense.

[Tom_T]

Jack Bogle didn't say "own the world market" nor "own international bonds." One may choose to do that, and that's fine. What one can't do is impose his own definition of "Boglehead" on everyone else.

[nisiprius]

The "argument from impurity."
"Do you drink alcohol?"
"No."
"But I've seen you drinking an NA beer."
"Sure, helps to fit in when everyone is drinking beer."
"But NA beer is 0.5% alcohol."
"I know."
"So you do drink alcohol! Ha! Gotcha! Have a boilermaker."

[dcabler]

No doubt there are reasons to do it but it is tilting away from a global market portfolio. My post is an effort to get Bogleheads to recognize their own biases.

We have more than a decade of threads on tilting, factors, US/International bonds, whether or not to hold international and what, exactly constitutes timing vs. what doesn't, etc. What do you expect this thread to bring that was not covered by previous discussions?

Cheers.

[jebmke]

I haven't seen comprehensive data either. One thought I'd add is that many of us got here already carrying significant "baggage." And in some cases, the tax cost to unwind and align perfectly with "the total market" would be onerous.

That said, I am always reminding myself of the term (I think it was Swedroe) "misdemeanor" for small investing "mistakes." In the end, it might be that disciplined saving and investing sensibly (albeit not ideally) has more impact on outcomes than the exact mix.

Now that I'm old and coasting to the end, I sometimes look at my allocation which is not "ideal" in the sense of total market but I usually come to the conclusion that I am being fairly compensated for the assets I am holding, my costs are quite low and I have more than enough to get me into the ground without being a financial burden on others and without compromising my desired lifestyle. So, my objectives are met.

[livesoft]

Seems like we take great pride in not timing the market ....

What you mean "We", Kemo Sabe?

[Trance]

I think a global stock portfolio is a no brainer. There are so many factors from currency strength to fundamentals that can give the impression that "this time it's different!" Before everything reverts to the mean. I think the inherent issue is that these periods away from the mean are on the span of not just years but sometimes a decade or more. That's a long time for humans. But it also means that performance chasers will get burned very long if the pendulum swings the other way.

The second issue is that sometimes things change. For example, for the bond world we have the rise of the emerging markets. They make up 25%+ of the global market. That is massive. But they are all not included in the aggregate indices. The biggest holding on Vanguard's VWOB emerging market bond etf is Saudi Arabia. Their credit rating is A. In fact 20% of the fund is A or higher and 46% of it is investment grade. But they're absent completely for the "total internetional" etfs like BNDX.

And then don't get me started on country's like India being kept below investment grade. The best part of a global portfolio is avoiding the politics that might impact individual parts.

[Tom_T]

There's another, very long thread where Bogleheads endlessly debate the merits of international investing.

[jebmke]

Seems like we take great pride in not timing the market ....

What you mean "We", Kemo Sabe?

I, for one, do not deny my tilting heritage.

[ApeAttack]

Uh oh guys, he's on to us. Time to shut this site down.

[nisiprius]

...I think the inherent issue is that these periods away from the mean are on the span of not just years but sometimes a decade or more...

Sometimes over a century. The Credit Suisse Global Investment Returns Yearbook 2017, Summary Edition--2017 being the last one in which they broke out an ex-US average. Inflation-adjusted, dividends included.

1900-2016:
United States, 6.4%/year
World ex-USA, 4.3%/year

In the longest record of real estate values, over 400 years in Amsterdam's Herengracht district, there's a period where the market was down for over a century.

In The Misbehavior of Markets, Benoit Mandelbrot argued that the behavior of markets is somewhere in between a normal distribution and a Cauchy distribution. The Cauchy distribution is so nightmarishly fat-tailed that it literally does not have an average. No matter how much data you take, there is a fair chance that you will get a data point that is so incredibly extreme that it's contribution to the mean is able to outweigh everything else that has come before. Financial markets may not literally be that bad, but short extreme events capable of moving long-term averages, we've seen that, right?

[betablocker]

Seems like we take great pride in not timing the market ....

What you mean "We", Kemo Sabe?

Deal with the argument not the person posting it.

[oldcomputerguy]

Topic locked for moderator review.

[Alex Frakt]

Unlocked. This is fine as long as it stays focused on investing.

[betablocker]

Seems like we take great pride in not timing the market and accepting what it gives by not tilting in favor of certain asset classes but most Bogleheads hold a disproportionate % or 100% US equities, don’t hold global bonds, and have timed the market by not holding much in the way of real assets and in particular commodities.

That bet has worked out for 40 years no doubt but it is tilting and timing. If you hold a 60/40 of US stocks and treasuries, you’re under diversified or over exposed to US market risk and inflation. Again, that’s been a good bet but it’s a bet not “holding the market portfolio.” Cullen Roche has done some good writing on this.

Tilting sure.

But if someone who picks a constant allocation and holds to it is "market timing" than the phrase is pretty meaningless to me. I think market timing as most of us understand requires active moves based on judgements about the future of the market and dynamic shifting among asset classes. So selling your stocks to go to cash because you think the market is overpriced. Or switching between asset classes because of predictions about the future. I think my definition is rather more standard than yours, see e.g. https://www.investopedia.com/terms/m/markettiming.asp

Fair point. What I wanted to highlight is that there have been long periods of time in which treasuries haven’t performed. Just not since the rise of bogleheads. Not including more real assets in your portfolio hasn’t been a great bet in those periods.

[betablocker]

I haven't seen comprehensive data either. One thought I'd add is that many of us got here already carrying significant "baggage." And in some cases, the tax cost to unwind and align perfectly with "the total market" would be onerous.

That said, I am always reminding myself of the term (I think it was Swedroe) "misdemeanor" for small investing "mistakes." In the end, it might be that disciplined saving and investing sensibly (albeit not ideally) has more impact on outcomes than the exact mix.

Now that I'm old and coasting to the end, I sometimes look at my allocation which is not "ideal" in the sense of total market but I usually come to the conclusion that I am being fairly compensated for the assets I am holding, my costs are quite low and I have more than enough to get me into the ground without being a financial burden on others and without compromising my desired lifestyle. So, my objectives are met.

Makes sense. I don’t dispute holding a more US tilted portfolio has been beneficial. But are we serving new people coming on the platform well by not telling them about our biases?

[betablocker]

Jack Bogle didn't say "own the world market" nor "own international bonds." One may choose to do that, and that's fine. What one can't do is impose his own definition of "Boglehead" on everyone else.

I guess to the extent that Bogleheads is just a reflection of Jack Bogle, I agree but I think the site also reflects a healthy debate about evidence based investing that goes beyond what Jack himself advocated for.

[betablocker]

It is impossible to be totally passive. You must make a decision to weight factors. Even choosing VT is an active decision. The fundamental premise behind John Bogle's philosophy is "low costs" and "stay the course." The best way to do that is to have an IPS and stick to it. A Boglehead can even have actively managed funds if they fit the bill of low costs and low turnover.

We are agreed on all points.

[prioritarian]

Seems like we take great pride in not timing the market ....

What you mean "We", Kemo Sabe?

When people respond with an ad hominem it can be a sign of cognitive dissonance.
Just saying...

[iceport]

No doubt there are reasons to do it but it is tilting away from a global market portfolio. My post is an effort to get Bogleheads to recognize their own biases.

On tilting?

Duly noted — as it was roughly 20 years ago when I set my asset allocation. As I think most of us here are aware.

On market timing?

First, speak for yourself! I am about as committed as anyone I've observed here in meticulously maintaining passive management. Only buy-hold-rebalance for me. Second, I don't see what you're using to support your assertion of market timing. Could you elaborate? Deciding not to hold real assets is an asset allocation decision, not a market timing tactic.

[jebmke]

I haven't seen comprehensive data either. One thought I'd add is that many of us got here already carrying significant "baggage." And in some cases, the tax cost to unwind and align perfectly with "the total market" would be onerous.

That said, I am always reminding myself of the term (I think it was Swedroe) "misdemeanor" for small investing "mistakes." In the end, it might be that disciplined saving and investing sensibly (albeit not ideally) has more impact on outcomes than the exact mix.

Now that I'm old and coasting to the end, I sometimes look at my allocation which is not "ideal" in the sense of total market but I usually come to the conclusion that I am being fairly compensated for the assets I am holding, my costs are quite low and I have more than enough to get me into the ground without being a financial burden on others and without compromising my desired lifestyle. So, my objectives are met.

Makes sense. I don’t dispute holding a more US tilted portfolio has been beneficial. But are we serving new people coming on the platform well by not telling them about our biases?

I don't keep track of posts on the subject but I will note a couple of observations.

When I post about tilting to SCV I always qualify that there are risks associated with it (especially nasty tracking error) and my choice to do it extremely aggressively was due to unique circumstances and not without that tracking error during massive technology runups.

I would also note that there have been extensive discussions on the entire subject of international weighting in portfolios and the "misalignment" with the global market is often front and center in the thread. Often opinions come down that essentially say "yes, I know but I'm ok with a US bias."

Finally, many (perhaps not enough) posts in response to new people refer them to the Wiki. I wish more people started there before posing a question since the information they are looking for is often there -- not just investing but broader personal finance information. Several members have invested significant amounts of personal time developing the content and it is a valuable resource.

[dcabler]

I haven't seen comprehensive data either. One thought I'd add is that many of us got here already carrying significant "baggage." And in some cases, the tax cost to unwind and align perfectly with "the total market" would be onerous.

That said, I am always reminding myself of the term (I think it was Swedroe) "misdemeanor" for small investing "mistakes." In the end, it might be that disciplined saving and investing sensibly (albeit not ideally) has more impact on outcomes than the exact mix.

Now that I'm old and coasting to the end, I sometimes look at my allocation which is not "ideal" in the sense of total market but I usually come to the conclusion that I am being fairly compensated for the assets I am holding, my costs are quite low and I have more than enough to get me into the ground without being a financial burden on others and without compromising my desired lifestyle. So, my objectives are met.

Makes sense. I don’t dispute holding a more US tilted portfolio has been beneficial. But are we serving new people coming on the platform well by not telling them about our biases?

I'm sure there are plenty of biases to go around, but if you look at the Bogleheads philosophy on the wiki, I don't see anything that explicitly says that "tilting" is anti-bogleheads. There are of course those who believe that anything but a total market (US or world) is somehow Market-Timing and thus anti-bogleheads. There are also those who believe that any sort of rebalancing is Market-Timing. In fact, there seems to be an "if I don't like it, it must be market timing" contingent that appears from time to time.

Good ideas needn't become dogma or used as a purity test.

https://www.bogleheads.org/wiki/Boglehe ... philosophy

Cheers.

[iceport]

Seems like we take great pride in not timing the market ....

What you mean "We", Kemo Sabe?

Deal with the argument not the person posting it.

I don't speak for livesoft, but I interpret his comment as a disagreement with your premise that all of us take great pride in not timing the market.

Livesoft actually seems to take great pride in actively timing the market, and he is rather famous for it, with his trademarked "RBDs" and all...

So not an attack on the poster, but a questioning of your premise.

[arcticpineapplecorp.]

Jack Bogle didn't say "own the world market" nor "own international bonds." One may choose to do that, and that's fine. What one can't do is impose his own definition of "Boglehead" on everyone else.

I guess to the extent that Bogleheads is just a reflection of Jack Bogle, I agree but I think the site also reflects a healthy debate about evidence based investing that goes beyond what Jack himself advocated for.

there have been posts that actually pointed out the contradictions at times between what Bogle said and what he did. Two such examples:

1. he said stay the course and don't market time, and yet there was a time when equity valuations were high when he did some "tactical" changes to his allocation. That's a form of market timing and he justified/rationalized (it's what we do to deal with the cognitive dissonance) why he did what he did.

2. He favored/promoted index funds, yet also invested in his son's actively managed mutual fund. He again, explained why he did this, which could be interpreted as more justifying/rationalizing. But at the same time he said if you have to own actively managed you might as well own them as cheaply as possible to improve your return.

[prioritarian]

Seems like we take great pride in not timing the market and accepting what it gives by not tilting in favor of certain asset classes but most Bogleheads hold a disproportionate % or 100% US equities, don’t hold global bonds, and have timed the market by not holding much in the way of real assets and in particular commodities.

That bet has worked out for 40 years no doubt but it is tilting and timing. If you hold a 60/40 of US stocks and treasuries, you’re under diversified or over exposed to US market risk and inflation. Again, that’s been a good bet but it’s a bet not “holding the market portfolio.” Cullen Roche has done some good writing on this.

[Title edited by admin Alex]

The funny thing is that some Bogleheads act as if owning international stocks is a tilt. The "VOO/VTSAX and chill" mantra is ubiquitous on reddit Bogleheads and to some extent on this site. And then there is the skepticism over the value of ETFs...sigh.

To answer your question: I think it makes sense to diversify into assets that increase returns while dampening volatility. Commodities, international bonds, and currency positions could make sense if the combination of these assets reduces volatility, risk and/or increases expected returns (and there is plenty of evidence that some of these combinations do this).

I recommend r/LETFs because once you ignore the TQQQ posts there is a lot of interesting exploration of how asset diversification and mild leverage can boost expected returns while maintaining acceptable levels of risk.

[pennsylvania211]

Could be wrong, but I always saw bogleheads as a loosely connected group of people who had some interest in Jack Bogle's philosophy on investing. And this forum as a place for discussion and debate of his investing philosophy.

Don't think there's a threshold/standard that must be met to be a boglehead.

https://en.wikipedia.org/wiki/No_true_Scotsman

[nisiprius]

...To answer your question: I think it makes sense to diversify into assets that increase returns while dampening volatility. Commodities, international bonds, and currency positions could make sense if the combination of these assets reduces volatility, risk and/or increases expected returns (and there is plenty of evidence that some of these combinations do this)...

The internal debate in the forum is not so much whether these things are or are not Bogleheadish, it's more whether or not they are really likely to "reduce volatility, risk and/or increase expected returns" going forward. Some of us think so, and they aren't crazy. Some of us don't, and they aren't crazy, either.

One of John C. Bogle's own characteristics was that he was never doctrinaire. I don't have his exact words handy, but he never said "Don't invest in international stocks." It was more something like "I don't think you need to have any international stocks, but a lot of experts disagree with me, so if you want to, go ahead, but limit it to 20% of your stock holdings."

[Fallible]

I haven't seen comprehensive data either. One thought I'd add is that many of us got here already carrying significant "baggage." And in some cases, the tax cost to unwind and align perfectly with "the total market" would be onerous.

That said, I am always reminding myself of the term (I think it was Swedroe) "misdemeanor" for small investing "mistakes." In the end, it might be that disciplined saving and investing sensibly (albeit not ideally) has more impact on outcomes than the exact mix.

Now that I'm old and coasting to the end, I sometimes look at my allocation which is not "ideal" in the sense of total market but I usually come to the conclusion that I am being fairly compensated for the assets I am holding, my costs are quite low and I have more than enough to get me into the ground without being a financial burden on others and without compromising my desired lifestyle. So, my objectives are met.

Makes sense. I don’t dispute holding a more US tilted portfolio has been beneficial. But are we serving new people coming on the platform well by not telling them about our biases?

I think if the OP initially makes clear his own biases and sources, then we are served well and can respond meaningfully.

[steadyosmosis]

Guilty.

[JakeyLee]

I didn’t even know what “tilting” was until recently. Question (not rhetorical, I swear): Unless we hold all asset classes, we are inherently tilters? I never owned any precious metals, but I’m sure there’s some company in the TSM that’s giving me some exposure. But does that mean I’ve been tilting too much towards equities all these years?
I own a home, but I don’t have any investment properties, or REITS. Am I tilting away from large sector of the economy with this decision? Meh, just trying to understand.

As for “timers” I call b.s.. I’m seeing more and more folks using a wide brush when trying to define market timing, lately. If you want to time, go for it. Heck, maybe your hunch will pay off. But mislabeling “most of us as timers” shouldn’t be the green light you need to justify such a game plan.

[cosmos]

"You're a market timer because you're don't invest in commodities!"

That doesn't even make sense.

What if your toilet is solid gold AND you hold low cost broad index funds?

[Beensabu]

"You're a market timer because you're don't invest in commodities!"

That doesn't even make sense.

What if your toilet is solid gold AND you hold low cost broad index funds?

It depends on how many bushels of beans you have stashed in your closets.

[Beensabu]

No doubt there are reasons to do it but it is tilting away from a global market portfolio.

People do what they want to do.

My post is an effort to get Bogleheads to recognize their own biases.

This is only possible if someone is actively seeking to identify their biases.

[yankees60]

I haven't seen comprehensive data either. One thought I'd add is that many of us got here already carrying significant "baggage." And in some cases, the tax cost to unwind and align perfectly with "the total market" would be onerous.

That said, I am always reminding myself of the term (I think it was Swedroe) "misdemeanor" for small investing "mistakes." In the end, it might be that disciplined saving and investing sensibly (albeit not ideally) has more impact on outcomes than the exact mix.

Now that I'm old and coasting to the end, I sometimes look at my allocation which is not "ideal" in the sense of total market but I usually come to the conclusion that I am being fairly compensated for the assets I am holding, my costs are quite low and I have more than enough to get me into the ground without being a financial burden on others and without compromising my desired lifestyle. So, my objectives are met.

Good explanation

[yankees60]

There's another, very long thread where Bogleheads endlessly debate the merits of international investing.

Very long is understating its length!

[yankees60]

Seems like we take great pride in not timing the market ....

What you mean "We", Kemo Sabe?

I, for one, do not deny my tilting heritage.

Did it Show up in your DNA analysis?

[yankees60]

...To answer your question: I think it makes sense to diversify into assets that increase returns while dampening volatility. Commodities, international bonds, and currency positions could make sense if the combination of these assets reduces volatility, risk and/or increases expected returns (and there is plenty of evidence that some of these combinations do this)...

The internal debate in the forum is not so much whether these things are or are not Bogleheadish, it's more whether or not they are really likely to "reduce volatility, risk and/or increase expected returns" going forward. Some of us think so, and they aren't crazy. Some of us don't, and they aren't crazy, either.

One of John C. Bogle's own characteristics was that he was never doctrinaire. I don't have his exact words handy, but he never said "Don't invest in international stocks." It was more something like "I don't think you need to have any international stocks, but a lot of experts disagree with me, so if you want to, go ahead, but limit it to 20% of your stock holdings."

Good example in last paragraph.

[TotalMarketTitan]

If a US bias is good enough for John C. Bogle, it's good enough for me.

[prioritarian]

...To answer your question: I think it makes sense to diversify into assets that increase returns while dampening volatility. Commodities, international bonds, and currency positions could make sense if the combination of these assets reduces volatility, risk and/or increases expected returns (and there is plenty of evidence that some of these combinations do this)...

The internal debate in the forum is not so much whether these things are or are not Bogleheadish, it's more whether or not they are really likely to "reduce volatility, risk and/or increase expected returns" going forward. Some of us think so, and they aren't crazy. Some of us don't, and they aren't crazy, either.

One of John C. Bogle's own characteristics was that he was never doctrinaire. I don't have his exact words handy, but he never said "Don't invest in international stocks." It was more something like "I don't think you need to have any international stocks, but a lot of experts disagree with me, so if you want to, go ahead, but limit it to 20% of your stock holdings."

I don't think Bogleheadish investing is about how Bogle himself invested but rather about the investing style that John Bogle enabled (e.g. cheap indices). IMO, the resulting "index and chill" investing movement has become a bit ossified and rigid so when someone brings up some new form of index there is an awful lot of push back. It's also a bit ironic because at one time mutual fund index investing was the new form of investing that eventually disrupted the entire investment industry so one would think that proponents of index investing would be more receptive to change.

[livesoft]

... become a bit ossified and rigid so when someone brings up some new form of index there is an awful lot of push back.

There was a time on this forum when many posters stated they would never use ETFs which were even sometimes characterized as a gateway drug to day trading. How have times changed.

[HootingSloth]

Seems like we take great pride in not timing the market and accepting what it gives by not tilting in favor of certain asset classes but most Bogleheads hold a disproportionate % or 100% US equities, don’t hold global bonds, and have timed the market by not holding much in the way of real assets and in particular commodities.

That bet has worked out for 40 years no doubt but it is tilting and timing. If you hold a 60/40 of US stocks and treasuries, you’re under diversified or over exposed to US market risk and inflation. Again, that’s been a good bet but it’s a bet not “holding the market portfolio.” Cullen Roche has done some good writing on this.

[Title edited by admin Alex]

I think the global market portfolio is a very useful starting point for determining an asset allocation and, for those inclined to think carefully about their personal asset allocation, thinking about how your personal circumstances differ from the circumstances of the average market participant can often provide a good framework. My general approach has been to use the global market portfolio as a starting point and to only tilt to the extent that I have a firm conviction that my personal risk profile, needs, and circumstances differ from that of the average market participant.

I will start by addressing real assets and physical commodities. Real assets and physical commodities derive their market value not from legal or financial rights associated with the assets, but instead from the fact that these assets can be used. Accordingly, I personally find it quite easy to think about how much of these assets I should hold. For example, rather than owning a tiny percentage stake in all personal residences in the world (not that this is feasible), I would rather own 100% of the particular personal residence that is best suited to my family. I also have pretty strong views about how much, say, corn or beef I have use for. These are not situations where I find it difficult to determine my personal needs, and so comparing to the average market participant is less useful here.

Sometimes when people refer to "commodities," they are referring to commodities derivatives, rather than physical commodities. Unlike physical commodities, commodities derivatives are financial assets that derive their market value from legal or financial rights. Fortunately, the net exposure of the average market participant to commodities derivatives is zero, because there are two counterparties on each side of any given derivatives contract. So, they (along with other financial derivatives like options, futures, swaps, etc.) can be safely ignored in the global market portfolio.

Moving on to stocks and bonds, I think the global market portfolio's allocation between stocks and bonds can provide a quite reasonable target for the stock/bond allocation of an investor. However, it is also quite possible and reasonable for an investor to decide that their individual trade-off between the higher average returns of stocks and the lower dispersion of returns of bonds differs from the average market participant. In particular, individuals should take into account their personal non-portfolio resources, including human capital, ability to be flexible in spending, Social Security benefits, pensions, etc. in setting an asset allocation between stocks and bonds. Your post does not seem to disagree with this, so you probably view this kind of "tilt" as acceptable.

Within stocks, again I start from the Global Market Portfolio and then tilt away from it only to the extent that I have a firm conviction that my risk profile or circumstances differ from the average market participant. With respect to my within-stock allocation, I have only been able to identify one of these differences, namely that I live in the U.S. and all of my future expenses will be paid in U.S. dollars. Because non-U.S. stocks have somewhat greater exposure to exchange rate risk than U.S. stocks, and because I believe that investors generally rationally adopt a degree of home-country bias in light of expropriation and tax risks, I think a tilt towards a U.S. portfolio is appropriate for me. For a variety of reasons, a chose a 80% Global Market Cap + 20% U.S tilt. Currently, this places my within-stock AA target at about 70% U.S. / 30% non-U.S. Siamond has a blog series that discusses adopting this kind of tilt.

Within fixed income, I have been able to find more ways in which my personal needs and circumstances diverge from the average market participant. In particular, I have a relatively firm grasp of my desire for liquidity and emergency expenses, which sets an amount of cash I hold within fixed income. I also have a firm conviction that I will have nominal liabilities derived from my particular mortgage, so mortgage prepayments are an important component of my fixed income allocation. Finally, I have a firm conviction that I would like to have an inflation-protected floor of income to bridge to the age at which my Social Security and pension benefits can be drawn, so I use a duration-matched ladder of TIPS for this purpose. These goals currently take up more room than I have for my total fixed income allocation, so I have no additional decisions to make on the fixed income side. In the future, I would have to decide whether the remainder should be in BND or BNDW (or something else).

So, yes, my portfolio is composed of a series of tilts away from the global market portfolio, and I find that often is a useful way of thinking about it.

[nisiprius]

I don't think the global market portfolio is a no-brainer, because there is no such thing as "the global market." There isn't even such a thing as "the global stock market."

The theory behind mimicking a total market and duplicating market capitalization is that the total market is optimally mean-variance efficient, i.e. has the highest Sharpe ratio... given a bunch of assumptions that are neither perfectly realistic nor totally crazy. But the theory behind it assumes that we do have a unified, single market, within which participants trade frictionlessly.

That's not a bad approximation to "the" US stock market (which is really maybe a half dozen or a dozen stock markets, but with electronic trading and algorithms arbitrating everything is pretty close to a single unified stock market). It's not such a good approximation for "the" global stock market, which includes twenty-one different national stock markets in the "$1 trillion club," and across which trading has numerous sources of friction, particularly the need to do currency conversions.

There's no "New York Bond Exchange" and it's not clear just what sort of beast "the" bond market is. It's even less clear that the stock and bond markets act like a single unified exchange with stocks and bonds trading in equilibrium with each other. William F. Sharpe thinks it's good enough to warrant holding four positions--in US stocks, ex-US stocks, US bonds, and ex-US bonds--in their global proportions. Vanguard's all-in-one LifeStrategy and Target Retirement funds hold those four asset classes (plus TIPS in a few cases). They don't exactly duplicate the global proportions, but they aren't light years away from.

Once you start throwing other assets into the mix, it gets more and more dubious. Especially when the assets aren't very liquid, don't have reliable market values, aren't publicly traded, have to be approximated by derivatives and what not, have only recently been "securitized," etc. etc. I don't, for example, buy the idea that we should overweight small caps to make up for our inability to invest in Jeanne's Nail Salon, Zenith Laundromat, and Ribeiro's Brazilian Groceries.

"All the stuff in the world" does not necessarily constitute a market.

It has been estimated that the walls in 1 in 20 US homes have a limited-edition print by Thomas Kinkade, Painter of Light® on the wall. Do I need to have some if I want to hold the global market portfolio?

[betablocker]

I didn’t even know what “tilting” was until recently. Question (not rhetorical, I swear): Unless we hold all asset classes, we are inherently tilters? I never owned any precious metals, but I’m sure there’s some company in the TSM that’s giving me some exposure. But does that mean I’ve been tilting too much towards equities all these years?
I own a home, but I don’t have any investment properties, or REITS. Am I tilting away from large sector of the economy with this decision? Meh, just trying to understand.

As for “timers” I call b.s.. I’m seeing more and more folks using a wide brush when trying to define market timing, lately. If you want to time, go for it. Heck, maybe your hunch will pay off. But mislabeling “most of us as timers” shouldn’t be the green light you need to justify such a game plan.

Yes deviating from a portfolio of all global assets is tilting. My point isn’t to say you shouldn’t tilt but to recognize that you are and when you call out someone for tilting to small cap value or emerging markets or whatever that you’re doing the same thing yourself just with different asset classes.