Bill Sharpe's preferred portfolio

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trueblueky
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Re: Bill Sharpe's preferred portfolio

Post by trueblueky » Thu Dec 19, 2019 1:13 pm

CyberBob wrote:
Thu Dec 19, 2019 1:04 pm
no simpler wrote:
Wed Dec 18, 2019 10:35 pm
This is actually one of the most theoretically sound portfolios you could construct, in a discipline that is still ruled largely by ad hoc heuristics and outright superstitions...
Along that line of thought, I was recently reading the book The Intelligent Portfolio by Christopher L. Jones, CIO of William Sharpe's Financial Engines (although I don't believe Sharpe is affiliated with Financial Engines anymore. Maybe not Jones either, as the book is from 2008).

But interestingly, Jones had this to say about a market portfolio:
  • Since the market proportions represent the market's consensus view of the value of each asset class, a fixed-proportion strategy like the 70 percent equity and 30 percent bond portfolio is inherently a market timing bet.

    If you believe in the market consensus, then when equities go up in proportion relative to bonds you should be willing to hold a little higher proportion of equities. If you sell the equities to maintain the original 70 percent proportion, then you are implicitly stating that you believe equities to be overvalued and bonds to be undervalued.

    By pursuing the contrarian strategy of rebalancing to fixed proportions you are actually making market timing bets on the relative value of asset classes that are different than the market consensus expectations. While there may be times when you intend to make such bets, in general most advisors and individual investors are not even aware that such strategies imply a market timing bet. Making a bet on the relative value of an asset class that is different from the market consensus may be ill-advised, but making an unintended bet is clearly a bad idea.
How do you do that easily?

MarkRoulo
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Re: Bill Sharpe's preferred portfolio

Post by MarkRoulo » Thu Dec 19, 2019 1:25 pm

CyberBob wrote:
Thu Dec 19, 2019 1:04 pm

But interestingly, Jones had this to say about a market portfolio:
  • Since the market proportions represent the market's consensus view of the value of each asset class, a fixed-proportion strategy like the 70 percent equity and 30 percent bond portfolio is inherently a market timing bet.

    If you believe in the market consensus, then when equities go up in proportion relative to bonds you should be willing to hold a little higher proportion of equities. If you sell the equities to maintain the original 70 percent proportion, then you are implicitly stating that you believe equities to be overvalued and bonds to be undervalued.
I think that "then you are implicitly stating that you believe equities to be overvalued and bonds to be undervalued" is not quite correct. A bunch of the folks buying and selling to get back to a desired stock:bond mix are trying to control risk.

The efficient market folks would suggest that a better way to control risk is that one keep the market portfolio and either:
  • Hold more cash (to dials back risk), or
  • Leverage the market portfolio (to increase risk)
Lots of non-professional types consider the second option to be crazy/unsafe (*), so they'd rather own 70:30 stocks:bonds than something closer to 50:50 with leverage (**).


(*) NOTE: Long Term Capital Management was run by just these sorts of folks. It basically collapsed in 1998, partially due to leverage. There may be some small kinks to work out, yet.

(**) NOTE: The theorists assume one can borrow at the risk-free rate. Normal people can't do that, so even if folks were okay leveraging up a 50:50 portfolio, theory doesn't necessarily say to do this because those folks can't borrow at the required rate.

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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Thu Dec 19, 2019 8:31 pm

MarkRoulo wrote:
Thu Dec 19, 2019 1:25 pm
CyberBob wrote:
Thu Dec 19, 2019 1:04 pm

But interestingly, Jones had this to say about a market portfolio:
  • Since the market proportions represent the market's consensus view of the value of each asset class, a fixed-proportion strategy like the 70 percent equity and 30 percent bond portfolio is inherently a market timing bet.

    If you believe in the market consensus, then when equities go up in proportion relative to bonds you should be willing to hold a little higher proportion of equities. If you sell the equities to maintain the original 70 percent proportion, then you are implicitly stating that you believe equities to be overvalued and bonds to be undervalued.
I think that "then you are implicitly stating that you believe equities to be overvalued and bonds to be undervalued" is not quite correct. A bunch of the folks buying and selling to get back to a desired stock:bond mix are trying to control risk.

The efficient market folks would suggest that a better way to control risk is that one keep the market portfolio and either:
  • Hold more cash (to dials back risk), or
  • Leverage the market portfolio (to increase risk)
Lots of non-professional types consider the second option to be crazy/unsafe (*), so they'd rather own 70:30 stocks:bonds than something closer to 50:50 with leverage (**).

Jones addresses your observation in the third paragraph:

"By pursuing the contrarian strategy of rebalancing to fixed proportions you are actually making market timing bets on the relative value of asset classes that are different than the market consensus expectations. While there may be times when you intend to make such bets, in general most advisors and individual investors are not even aware that such strategies imply a market timing bet. Making a bet on the relative value of an asset class that is different from the market consensus may be ill-advised, but making an unintended bet is clearly a bad idea."

Sharpe has a paper entitled Adaptive Asset Allocation (AAA) which develops a Formula 15 that can be used to "rebalance" a portfolio whose original allocation was different than the market. You can easily embed a table constructed from formula 15 in your portfolio spreadsheet with original and current allocation percentage inputs to generate rebalanced allocation percentages.


(*) NOTE: Long Term Capital Management was run by just these sorts of folks. It basically collapsed in 1998, partially due to leverage. There may be some small kinks to work out, yet.

(**) NOTE: The theorists assume one can borrow at the risk-free rate. Normal people can't do that, so even if folks were okay leveraging up a 50:50 portfolio, theory doesn't necessarily say to do this because those folks can't borrow at the required rate.
Sharpe intends that a TIPS ladder or TIPS fund(s) be held as the riskless asset(s) along with the world market (risk) portfolio.
Last edited by pascalwager on Thu Dec 19, 2019 11:20 pm, edited 1 time in total.

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Re: Bill Sharpe's preferred portfolio

Post by AlohaJoe » Thu Dec 19, 2019 9:01 pm

no simpler wrote:
Wed Dec 18, 2019 10:35 pm
This is actually one of the most theoretically sound portfolios you could construct
I'm not convinced about that. There are so many government imposed distortions and frictions around the world, it is hard to know how close this would be a real market portfolio.

Even something simple like: what if the Social Security Trust Fund wasn't mandated by law to be held in US government bonds? That's $2.8 trillion right there, enough to buy 10% of the entire US stock market. (And it isn't crazy to imagine a scenario like that; that's basically what George W. Bush's private social security accounts were.) Insurance companies. Pension funds. Capital controls. Frictions to international trading in almost every non-US country. (Sure, it is easy for Americans to buy international funds; try buying an international fund in Saudi Arabia and see if you get $0 trades and a 0.07% ER. Heck, I couldn't even do it in Australia!)

Given all of that, I've never been able to decide how far off from "the real market portfolio" the current "market portfolio" actually is.

columbia
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Re: Bill Sharpe's preferred portfolio

Post by columbia » Fri Dec 20, 2019 10:12 am

He doesn’t say in the video, but has Mr. Sharpe indicated elsewhere as to why he thinks a market float of stocks vs. bonds is desirable?

no simpler
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Re: Bill Sharpe's preferred portfolio

Post by no simpler » Fri Dec 20, 2019 1:37 pm

AlohaJoe wrote:
Thu Dec 19, 2019 9:01 pm
no simpler wrote:
Wed Dec 18, 2019 10:35 pm
This is actually one of the most theoretically sound portfolios you could construct
I'm not convinced about that. There are so many government imposed distortions and frictions around the world, it is hard to know how close this would be a real market portfolio.

Even something simple like: what if the Social Security Trust Fund wasn't mandated by law to be held in US government bonds? That's $2.8 trillion right there, enough to buy 10% of the entire US stock market. (And it isn't crazy to imagine a scenario like that; that's basically what George W. Bush's private social security accounts were.) Insurance companies. Pension funds. Capital controls. Frictions to international trading in almost every non-US country. (Sure, it is easy for Americans to buy international funds; try buying an international fund in Saudi Arabia and see if you get $0 trades and a 0.07% ER. Heck, I couldn't even do it in Australia!)

Given all of that, I've never been able to decide how far off from "the real market portfolio" the current "market portfolio" actually is.
That's a very good point. Before you posted this I actually thought about the case of Australia - my friend there says it's very hard to buy foreign shares in practice. Personally, I use a sort of hierarchical risk parity weighting. I think the main point is that a fixed allocation is likely not truly efficient for a given point in time.

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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Fri Dec 20, 2019 10:30 pm

columbia wrote:
Fri Dec 20, 2019 10:12 am
He doesn’t say in the video, but has Mr. Sharpe indicated elsewhere as to why he thinks a market float of stocks vs. bonds is desirable?
Because, in his view, you're investing and not betting when you hold the market portfolio, and it's the only portfolio that every investor can hold at once. But he discusses this in Section 7 of RISMAT.

If you hold the market portfolio, you only need an advisor to help size the safety net (TIPS portfolio) at a presumably small fee. When I asked him about individual small investors not being average investors respecting the bond funds, he acknowledged that possibility, but thought the inefficiency would be covered by the TIPS safety net (which can vary between 0 and 100% of assets).

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Re: Bill Sharpe's preferred portfolio

Post by columbia » Fri Dec 20, 2019 10:46 pm

pascalwager wrote:
Fri Dec 20, 2019 10:30 pm
columbia wrote:
Fri Dec 20, 2019 10:12 am
He doesn’t say in the video, but has Mr. Sharpe indicated elsewhere as to why he thinks a market float of stocks vs. bonds is desirable?
Because, in his view, you're investing and not betting when you hold the market portfolio, and it's the only portfolio that every investor can hold at once. But he discusses this in Section 7 of RISMAT.

If you hold the market portfolio, you only need an advisor to help size the safety net (TIPS portfolio) at a presumably small fee. When I asked him about individual small investors not being average investors respecting the bond funds, he acknowledged that possibility, but thought the inefficiency would be covered by the TIPS safety net (which can vary between 0 and 100% of assets).
I imagine that is his view (given the choice), but he never expresses that rationale in the video; hence the question.

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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Sat Dec 21, 2019 12:55 pm

Quark wrote:
Mon Jan 09, 2017 9:29 pm
Global stocks and bonds, cap weighted, free float, plus TIPS to taste. See https://www.youtube.com/watch?v=XsXOLZ9U7jI at about 39:00.

He uses Vanguard funds.
So what's the guidance on the AA ratio between the 'tradable stuff' (stocks/bonds) vs the TIPS?

It seems pretty vague.
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Sat Dec 21, 2019 3:01 pm

Dirghatamas wrote:
Thu May 04, 2017 2:22 pm
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
I would disagree with this and give some reasons. For the record, I have done this (market cap global stocks 100% with 0% bonds) for 25 years so have had some time to think about it.

Stocks and bonds are truly different markets and shouldn't be clubbed together. Bonds in particular are weird because there are lots of laws which force their usage. First, there are big whales like central banks which can buy bonds (usually their own country and only modestly of other countries) which can distort market cap. Further large insurance companies have to buy bonds of certain durations for liability matching. Large sovereign funds, endowments, non profits, pension funds often have laws about what they can invest in. Often they are told by law to hold at least X% of a country's bonds regardless of whether they want to or not.

Consider the Norwegian sovereign fund which is almost a trillion dollars. Its was explicitly allowed to hold < a certain % in stocks and pushed to increase it recently. Similarly Japan Post pension, the largest pension fund in the world was till recently forced to only invest in Japanese bonds. More recently, under Abe, it was allowed to invest (a certain %) in foreign bonds and even more recently a certain % in stocks.

All this creates a lot of inefficiencies. I see absolutely no reason why a retail investor should try to mimic this market capitalization. It makes no sense whatsoever because it is NOT an efficient market. Whales hold what they hold because they are told to..while a retail investor has no such restriction.

Stocks are very different. First the main non mobile part of stocks are insiders like founders, states, Govts etc. These are already removed when indexes are created (free float capitalization). What is left is freely investable (with some minor exceptions like China A shares). As far as I know, whales have no restrictions once they are allowed to own stocks as to which stocks they should own. This creates a much more efficient market place compared to bonds as capital can flow freely.

As such, I think the world capitalization argument for stocks makes a hell of a lot more sense than for bonds.
This is very well thought out. Thank you for writing this.

I, too, think of stocks and bonds as very different markets, for all the reasons you just said.

So where does that leave real estate?

If I recall, correctly, real estate is the largest asset class in the world, but most of it isn't securitized and thus isn't liquid enough to invest in. And, personally, I think of REITs as "not really real estate", but just a stock sector.
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Sun Dec 22, 2019 4:03 pm

watchnerd wrote:
Sat Dec 21, 2019 12:55 pm
Quark wrote:
Mon Jan 09, 2017 9:29 pm
Global stocks and bonds, cap weighted, free float, plus TIPS to taste. See https://www.youtube.com/watch?v=XsXOLZ9U7jI at about 39:00.

He uses Vanguard funds.
So what's the guidance on the AA ratio between the 'tradable stuff' (stocks/bonds) vs the TIPS?

It seems pretty vague.
Sharpe just leaves it to your advisor.

The TIPS safety net adds to your reliable non-portfolio income in retirement: SS, pension, etc. The percentage is a personal choice. Some might even need to forego the safety net and use 100% world stocks because of inadequate savings, etc.

Michael Edesess (The 3 Simple Rules of Investing) uses a version which he calls the Simplifying Wall Street Portfolio (SWT): TIPS + total world stocks. He gives two examples using 25% and 50% TIPS for a person with $150,000 work income. He doesn't use the total bond index funds since risk can be controlled with the TIPS safety net.

My own SWT portfolio has 55% world stocks and 45% bonds (47% TIPS + 53% TBM)--one of my largest accounts doesn't have a TIPS option.

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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Sun Dec 22, 2019 4:40 pm

pascalwager wrote:
Sun Dec 22, 2019 4:03 pm
watchnerd wrote:
Sat Dec 21, 2019 12:55 pm
Quark wrote:
Mon Jan 09, 2017 9:29 pm
Global stocks and bonds, cap weighted, free float, plus TIPS to taste. See https://www.youtube.com/watch?v=XsXOLZ9U7jI at about 39:00.

He uses Vanguard funds.
So what's the guidance on the AA ratio between the 'tradable stuff' (stocks/bonds) vs the TIPS?

It seems pretty vague.
Sharpe just leaves it to your advisor.

The TIPS safety net adds to your reliable non-portfolio income in retirement: SS, pension, etc. The percentage is a personal choice. Some might even need to forego the safety net and use 100% world stocks because of inadequate savings, etc.

Michael Edesess (The 3 Simple Rules of Investing) uses a version which he calls the Simplifying Wall Street Portfolio (SWT): TIPS + total world stocks. He gives two examples using 25% and 50% TIPS for a person with $150,000 work income. He doesn't use the total bond index funds since risk can be controlled with the TIPS safety net.

My own SWT portfolio has 55% world stocks and 45% bonds (47% TIPS + 53% TBM)--one of my largest accounts doesn't have a TIPS option.
Hmmmm.

I guess the distinction seems a bit arbitrary to put some types of fixed income into his "tradeable stuff" portfolio, and another kind, like TIPS, into a completely different bucket.

I guess he mentally considers TIPS to be cash.
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Sun Dec 22, 2019 6:30 pm

Okay, I read section 7, of RISMAT 7, on the Market Portfolio:

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

And after a lot of theory, both mundane (low ER is good, active management is costly), and some deeper (discussion of efficient frontiers), the theory seems to boil down to the following in practice:

Stocks: 55% / Bonds: 45%

US Stocks: 30% / US Bonds: 23%

Intl Stocks: 25% / Intl Bonds: 22%


He also specifically mentions the usual Vanguard suspects as good choices.

So we're now left with a variation on the typical Vanguard 4 fund portfolio.

Rounding to the nearest 5% (where I do my rebalancing), I'd be left to choose between a 60/40 or a 50/50 portfolio, which he also remarks on:

"Note also that at the time, the value of stocks exceeded that of bonds, falling almost midway between the often recommended 60/40 mix of stocks and bonds and the somewhat less common advice to hold 50/50 proportions. "

At this point, I can see why Vanguard has not yet taken Sharpe up on his offer, as they already offer something very close to what his paper advocates, within the limits of what is practical and liquid.
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Re: Bill Sharpe's preferred portfolio

Post by CyberBob » Sun Dec 22, 2019 7:14 pm

watchnerd wrote:
Sun Dec 22, 2019 6:30 pm
At this point, I can see why Vanguard has not yet taken Sharpe up on his offer, as they already offer something very close to what his paper advocates, within the limits of what is practical and liquid.
Yeah, they already have Total World Bond (BNDW) as an ETF-of-ETF''s. All they would have to do is throw a third ETF in there (Total World Stock, VT) and it would be one-fund nirvana.

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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Sun Dec 22, 2019 7:35 pm

CyberBob wrote:
Sun Dec 22, 2019 7:14 pm
watchnerd wrote:
Sun Dec 22, 2019 6:30 pm
At this point, I can see why Vanguard has not yet taken Sharpe up on his offer, as they already offer something very close to what his paper advocates, within the limits of what is practical and liquid.
Yeah, they already have Total World Bond (BNDW) as an ETF-of-ETF''s. All they would have to do is throw a third ETF in there (Total World Stock, VT) and it would be one-fund nirvana.
Yeah.

And to avoid the complexities of "bucket accounting" that his "risky assets + TIPS" approach advocates, in our present low-yield bond world, I think you can capture the spirit of the intent, without being slavish with something like:

55-60% Total World Stocks
30-35% Total World Bonds
5-10% Short term reserves: TIPS/CDs/cash

Playing around with Portfolio Visualizer, I was surprised at the benefits in volatility reduction that US-Hedged International Bonds brought to the party; I had pretty much dismissed them as worthless due to the low yield and the fact that dollar-hedging removes the currency diversification.
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Re: Bill Sharpe's preferred portfolio

Post by longinvest » Sun Dec 22, 2019 8:25 pm

watchnerd wrote:
Sun Dec 22, 2019 6:30 pm
At this point, I can see why Vanguard has not yet taken Sharpe up on his offer, as they already offer something very close to what his paper advocates, within the limits of what is practical and liquid.
I think that Vanguard's LifeStrategy Moderate Growth fund is a pretty good proxy for Bill Sharpe's market portfolio, adapted for a US investor. Its 60/40 stock/bond ratio is close to that of the market. It does have a moderate amount of home bias, but this is logically justified by the additional frictions of international investing. I've linked to an interesting Vanguard paper about the role of home bias in a global portfolio in my post about the One-Fund Portfolio.

LifeStrategy funds never exactly match their target allocation. I suspect (I have no proof!) that Vanguard has considered Sharpe's ideas about the contrarian nature of aggressively rebalancing a portfolio to a static target and has, as a result, adopted a flexible approach of slow rebalancing, probably taking advantage of cash flows in and out of these funds. In his paper about Adaptive Asset Allocation Policies, Sharpe presented a flexible non-contrarian framework for rebalancing a portfolio. Even though it's mostly addressed to fund companies like Vanguard, it has little applicability in real life: how would an investor determine which fund to select, if the stock/bond ratio keeps changing? It's probably best to do like Vanguard does with its LifeStrategy funds, aim for a specific ratio, but avoid aggressive contrarian trades by rebalancing slowly. Anyway, it's what I suspect.
Last edited by longinvest on Sun Dec 22, 2019 8:29 pm, edited 1 time in total.
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Sun Dec 22, 2019 8:43 pm

longinvest wrote:
Sun Dec 22, 2019 8:25 pm
watchnerd wrote:
Sun Dec 22, 2019 6:30 pm
At this point, I can see why Vanguard has not yet taken Sharpe up on his offer, as they already offer something very close to what his paper advocates, within the limits of what is practical and liquid.
I think that Vanguard's LifeStrategy Moderate Growth fund is a pretty good proxy for Bill Sharpe's market portfolio, adapted for a US investor. Its 60/40 stock/bond ratio is close to that of the market. It does have a moderate amount of home bias, but this is logically justified by the additional frictions of international investing. I've linked to an interesting Vanguard paper about the role of home bias in a global portfolio in my post about the One-Fund Portfolio.

LifeStrategy funds never exactly match their target allocation. I suspect (I have no proof!) that Vanguard has considered Sharpe's ideas about the contrarian nature of aggressively rebalancing a portfolio to a static target and has, as a result, adopted a flexible approach of slow rebalancing, probably taking advantage of cash flows in and out of these funds. In his paper about Adaptive Asset Allocation Policies, Sharpe presented a flexible non-contrarian framework for rebalancing a portfolio. Even though it's mostly addressed to fund companies like Vanguard, it has little applicability in real life: how would an investor determine which fund to select, if the stock/bond ratio keeps changing? It's probably best to do like Vanguard does with its LifeStrategy funds, aim for a specific ratio, but avoid aggressive contrarian trades by rebalancing slowly. Anyway, it's what I suspect.
Thanks for the link to your One Portfolio post. I'll read that now.
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Re: Bill Sharpe's preferred portfolio

Post by no simpler » Fri Jan 03, 2020 1:59 pm

Playing with Portfolio Visualizer's rolling optimization, you can see why Sharpe himself recommends a market cap weight global portfolio and NOT rolling sharpe optimization:
https://www.portfoliovisualizer.com/rol ... ymbol4=BND

The above shows the performance of the rolling 12 month sharpe optimized portfolio comprised of four ETFs covering global stocks and bonds. Notice that even just using an equal weight portfolio has a higher sharpe ratio than optimizing based on historical sharpe ratio!

I think the key insight here is that markets are forward looking, and prices take into account all forward expectations, hence why a market cap weighted portfolio makes more sense than back-fitting optimization. Inverse volatility and risk parity weighting also works pretty well, as it doesn't overfit to the same degree. Risk parity can also make use of the market's future expectations via the implied volatility from option prices.

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Re: Bill Sharpe's preferred portfolio

Post by Dink2018 » Sat Jan 04, 2020 2:04 pm

Is there a link to a place I can easily find the market cap weight every month?

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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Sat Jan 04, 2020 2:39 pm

Dink2018 wrote:
Sat Jan 04, 2020 2:04 pm
Is there a link to a place I can easily find the market cap weight every month?
Are you planning to rebalance every month?

The market caps don't typically shift that fast.
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Re: Bill Sharpe's preferred portfolio

Post by aj76er » Sat Jan 04, 2020 9:16 pm

Dink2018 wrote:
Sat Jan 04, 2020 2:04 pm
Is there a link to a place I can easily find the market cap weight every month?
Vanguard updates it's holdings for VT, Total World Stock ETF, every quarter, here:
https://advisors.vanguard.com/investmen ... #portfolio

Scroll down the page until you see "Weight Exposures", then click the "Markets" tab. United States is listed first. Subtract that number from 100% to get the exU.S. percentage. This is not as accurate as what CyberBob posts, but it should be good enough for general rebalancing if you want to hold equity funds separately (e.g. VTI and VXUS).

You can check the same thing for BNDW, Total World Bond ETF. I don't personally use International Bonds, but I'm sure they show the same breakdown.

As for the exact weightings between world bonds and stocks, I don't know of an easy way to get that other than the index provider fact sheets. But it generally stays between 60/40 and 50/50 stocks/bonds; so you could just pick something between that range and call it good enough.
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Re: Bill Sharpe's preferred portfolio

Post by palanzo » Fri Jan 10, 2020 10:58 pm

watchnerd wrote:
Sun Dec 22, 2019 7:35 pm
CyberBob wrote:
Sun Dec 22, 2019 7:14 pm
watchnerd wrote:
Sun Dec 22, 2019 6:30 pm
At this point, I can see why Vanguard has not yet taken Sharpe up on his offer, as they already offer something very close to what his paper advocates, within the limits of what is practical and liquid.
Yeah, they already have Total World Bond (BNDW) as an ETF-of-ETF''s. All they would have to do is throw a third ETF in there (Total World Stock, VT) and it would be one-fund nirvana.
Yeah.

And to avoid the complexities of "bucket accounting" that his "risky assets + TIPS" approach advocates, in our present low-yield bond world, I think you can capture the spirit of the intent, without being slavish with something like:

55-60% Total World Stocks
30-35% Total World Bonds
5-10% Short term reserves: TIPS/CDs/cash

Playing around with Portfolio Visualizer, I was surprised at the benefits in volatility reduction that US-Hedged International Bonds brought to the party; I had pretty much dismissed them as worthless due to the low yield and the fact that dollar-hedging removes the currency diversification.
How did you decide on the 5-10% Short term reserves: TIPS/CDs/cash? And what purpose does this serve in the overall portfolio?

Do you have a link to your Portfolio Visualizer experiments?

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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Sat Jan 11, 2020 12:12 am

palanzo wrote:
Fri Jan 10, 2020 10:58 pm


How did you decide on the 5-10% Short term reserves: TIPS/CDs/cash? And what purpose does this serve in the overall portfolio?

Do you have a link to your Portfolio Visualizer experiments?
The 5-10% came from my personal estimate of how many years of COL the typical investor might want in riskless, lower yield, cash equivalent investments. And the TIPS reference should be to short term TIPS (i.e. <2.5 years duration).

Sorry, I didn't save the PV links, but you can easily create your own using the same parameters in the asset class backtesting tool
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Re: Bill Sharpe's preferred portfolio

Post by palanzo » Sat Jan 11, 2020 7:52 pm

watchnerd wrote:
Sat Jan 11, 2020 12:12 am
palanzo wrote:
Fri Jan 10, 2020 10:58 pm


How did you decide on the 5-10% Short term reserves: TIPS/CDs/cash? And what purpose does this serve in the overall portfolio?

Do you have a link to your Portfolio Visualizer experiments?
The 5-10% came from my personal estimate of how many years of COL the typical investor might want in riskless, lower yield, cash equivalent investments. And the TIPS reference should be to short term TIPS (i.e. <2.5 years duration).

Sorry, I didn't save the PV links, but you can easily create your own using the same parameters in the asset class backtesting tool
https://www.portfoliovisualizer.com/bac ... tion4_2=20

I am not seeing a volatility reduction, however one is limited by the lookback available for BNDX. Did you use a different international hedged bond fund?

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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Sat Jan 11, 2020 8:07 pm

palanzo wrote:
Sat Jan 11, 2020 7:52 pm
watchnerd wrote:
Sat Jan 11, 2020 12:12 am
palanzo wrote:
Fri Jan 10, 2020 10:58 pm


How did you decide on the 5-10% Short term reserves: TIPS/CDs/cash? And what purpose does this serve in the overall portfolio?

Do you have a link to your Portfolio Visualizer experiments?
The 5-10% came from my personal estimate of how many years of COL the typical investor might want in riskless, lower yield, cash equivalent investments. And the TIPS reference should be to short term TIPS (i.e. <2.5 years duration).

Sorry, I didn't save the PV links, but you can easily create your own using the same parameters in the asset class backtesting tool
https://www.portfoliovisualizer.com/bac ... tion4_2=20

I am not seeing a volatility reduction, however one is limited by the lookback available for BNDX. Did you use a different international hedged bond fund?
Use the asset class backtester, not the ticker backtester.
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Re: Bill Sharpe's preferred portfolio

Post by palanzo » Sat Jan 11, 2020 8:25 pm

watchnerd wrote:
Sat Jan 11, 2020 8:07 pm
palanzo wrote:
Sat Jan 11, 2020 7:52 pm
watchnerd wrote:
Sat Jan 11, 2020 12:12 am
palanzo wrote:
Fri Jan 10, 2020 10:58 pm


How did you decide on the 5-10% Short term reserves: TIPS/CDs/cash? And what purpose does this serve in the overall portfolio?

Do you have a link to your Portfolio Visualizer experiments?
The 5-10% came from my personal estimate of how many years of COL the typical investor might want in riskless, lower yield, cash equivalent investments. And the TIPS reference should be to short term TIPS (i.e. <2.5 years duration).

Sorry, I didn't save the PV links, but you can easily create your own using the same parameters in the asset class backtesting tool
https://www.portfoliovisualizer.com/bac ... tion4_2=20

I am not seeing a volatility reduction, however one is limited by the lookback available for BNDX. Did you use a different international hedged bond fund?
Use the asset class backtester, not the ticker backtester.
I did not know one could. Thanks.

https://www.portfoliovisualizer.com/bac ... tion4_2=40

I don't see the volatility reduction. I am using TBM and Global Bonds USD Hedged. Did you do something different?

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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Sat Jan 11, 2020 8:30 pm

palanzo wrote:
Sat Jan 11, 2020 8:25 pm
watchnerd wrote:
Sat Jan 11, 2020 8:07 pm
palanzo wrote:
Sat Jan 11, 2020 7:52 pm
watchnerd wrote:
Sat Jan 11, 2020 12:12 am
palanzo wrote:
Fri Jan 10, 2020 10:58 pm


How did you decide on the 5-10% Short term reserves: TIPS/CDs/cash? And what purpose does this serve in the overall portfolio?

Do you have a link to your Portfolio Visualizer experiments?
The 5-10% came from my personal estimate of how many years of COL the typical investor might want in riskless, lower yield, cash equivalent investments. And the TIPS reference should be to short term TIPS (i.e. <2.5 years duration).

Sorry, I didn't save the PV links, but you can easily create your own using the same parameters in the asset class backtesting tool
https://www.portfoliovisualizer.com/bac ... tion4_2=20

I am not seeing a volatility reduction, however one is limited by the lookback available for BNDX. Did you use a different international hedged bond fund?
Use the asset class backtester, not the ticker backtester.
I did not know one could. Thanks.

https://www.portfoliovisualizer.com/bac ... tion4_2=40

I don't see the volatility reduction. I am using TBM and Global Bonds USD Hedged. Did you do something different?
Look at the Sharpe and Sortino ratios.
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Re: Bill Sharpe's preferred portfolio

Post by longinvest » Sun Jan 12, 2020 7:31 pm

CyberBob wrote:
Wed Dec 18, 2019 7:03 pm
30 November 2019 FTSE numbers (in millions of USD):

30,668,188 - U.S. stocks - FTSE Global All-Cap index, U.S. breakdown
24,591,817 - ex U.S. stocks - FTSE Global All-Cap index minus U.S.
22,522,290 - U.S. bonds - FTSE US Broad Investment-Grade index
19,350,730 - ex U.S. bonds - FTSE World Broad Investment-Grade index minus U.S.

So that equates to allocation percentages of:

31.57% US stocks (VTSAX,VTI,ITOT)
25.32% ex US stocks (VTIAX,VXUS,IXUS)
23.19% US bonds (VBTLX,BND,AGG)
19.92% ex US bonds (VTABX,BNDX,IAGG)

Or, alternatively:

56.89% world stocks (VT,VTWAX)
43.11% world bonds (BNDW)
CyberBob, in another thread, forum member danielc wrote that the global ratio is closer to 33/67 stocks/bonds than to 57/43, and he provided a link:
danielc wrote:
Sun Jan 12, 2020 6:36 pm
longinvest wrote:
Sun Jan 12, 2020 6:19 pm
danielc wrote:
Sun Jan 12, 2020 6:04 pm
... But a global portfolio would be closer to 33/67 stock/bond I believe.
I think that this is way off. The recent ratio is provided in the thread Bill Sharpe's preferred portfolio. It's 57/43 world-stocks/world-bonds (VT/BNDW). I think that 60/40 is close enough.
But... the US bond market is larger than the US stock market. And internationally the difference is even larger.
Who's right?
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Does it matter?

Post by Taylor Larimore » Sun Jan 12, 2020 8:08 pm

Who's right?
Does it matter?

Taylor
Jack Bogle's Words of Wisdom: “This business is all about simplicity and low cost. I’m not into all these market strategies and theories and cost-benefit analyses — all the bureaucracy that goes with business. In investing, strip all the baloney out of it, and give people what you promise.”
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Re: Does it matter?

Post by longinvest » Mon Jan 13, 2020 9:06 am

Taylor Larimore wrote:
Sun Jan 12, 2020 8:08 pm
Who's right?
Does it matter?
Taylor,

I think that we don't need the answer ("Who's right?") to know that both asset classes are gigantic and can accommodate whatever asset allocation individual investors like us want to use in their portfolios.

While William Sharpe's arguments about the contrarian aspects of aggressive rebalancing are sensible, the typical Bogleheads approach of mild rebalancing by investing contributions into the asset class below target during accumulation and withdrawing from the asset class above target during retirement, combined with occasional rebalancing on one's birthday at most once a year when an asset class in the portfolio is too far off its target allocation, is good enough.

The idea that the overall global-stock-and-bond market could, theoretically, be considered as "The Haystack" can only work in an utopian world with a single currency and political entity. Unfortunately, we live in the real world where frictions exist and are different for different investors holding the same financial securities. Let me explain.

The same stock or bond doesn't deliver the same after-tax and inflation-adjusted return, in the investor's currency, to two investors, one domestic, the other foreign, due currency fluctuations, different domestic inflation rates, and different fees and taxes. Even within a single country, the same financial security doesn't deliver the same after-tax return to two domestic investors when one places the security in a tax-advantaged account and the other places the security in a taxable account.

More importantly, stocks and bonds are significantly different asset classes. While stocks offer a higher possibility of superior returns, they are significantly more volatile than bonds. Not all investors can objectively afford the same exposure to stock volatility, and not all investors have the same subjective preference for taking risk in the hope of possibly gaining more.

As a result, I think that these practical issues defeat the idea of an "ideal identical portfolio for everyone" perfectly mimicking the global-stock-and-bond market portfolio.

I think that the practical principles of our Bogleheads investment philosophy are good enough:
  • Never bear too much or too little risk: Choose an appropriate stock and bond allocation. It can be a fixed allocation or a gliding allocation (changing with age).
  • Never try to time the market: Don't set your allocation based on so-called "market valuations". Your asset allocation should be independent of the state of the stock and bond markets. The allocation to stocks should be based to your objective financial capacity to withstand their volatility and your subjective preference to be exposed to it, not based on whether you think that they're headed up or headed down.
  • Diversify: Invest into broad market funds, domestically and internationally. Avoid, if possible, market segment funds.
  • Use index funds when possible: Use capitalization-weighted funds.
  • Keep costs low: Don't pay commissions, use low-cost funds, and don't give away a percent of your portfolio to a financial advisor.
  • Invest with simplicity: Only use a few broad funds, like the Three-Fund Portfolio or a low-cost all-in-one globally-diversified balanced index fund like a LifeStrategy or Target Retirement fund (which I call a One-Fund Portfolio).
  • Stay the course: Rebalance your portfolio with cash flows and once a year on your birthday when the portfolio is too far off target. Stop paying attention to financial media. Don't read forum posts about how to "optimize" your portfolio and its returns. Be satisfied with a good enough portfolio and a simple investing approach.
So, Taylor, my answer to your question ("Does it matter?") is: I don't think so.

Thank you for causing me to reflect on this.

longinvest
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Mon Jan 13, 2020 10:21 am

longinvest wrote:
Sun Jan 12, 2020 7:31 pm


Who's right?
Most of the sources I've read have said the global bond market is quite a bit bigger than the global stock market.

So the 57/43 number must be using some kind of filter, perhaps some kind of float adjustment.
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Re: Bill Sharpe's preferred portfolio

Post by CyberBob » Mon Jan 13, 2020 2:24 pm

longinvest wrote:
Sun Jan 12, 2020 7:31 pm
CyberBob, in another thread, forum member danielc wrote that the global ratio is closer to 33/67 stocks/bonds than to 57/43...Who's right?
Going by the actual index-provider data that Sharpe mentions, 31 December 2019 numbers show it as:

Stocks: $57,105,259,000,000 (FTSE Global All-Cap Stock Index)
Bonds: $42,079,040,000,000 (FTSE World Broad Investment-Grade Bond Index)

So that's 57.57% stocks, 42.43% bonds.

Interestingly, that's virtually identical to the 'everything' index, the MSCI Global Capital Markets index from way back in 2006. This would seemingly be the Sharpe-approved index to follow. Unfortunately, they stopped publicly available access to the index back in 2006.

Image

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Re: Bill Sharpe's preferred portfolio

Post by Taylor Larimore » Mon Jan 13, 2020 2:44 pm

longinvest:

Thank you for your excellent and lengthy reply and restating the Boglehead Principles we so often forget.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "I believe the classic index fund must be the core of that winning strategy."
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Mon Jan 13, 2020 2:48 pm

CyberBob wrote:
Mon Jan 13, 2020 2:24 pm
longinvest wrote:
Sun Jan 12, 2020 7:31 pm
CyberBob, in another thread, forum member danielc wrote that the global ratio is closer to 33/67 stocks/bonds than to 57/43...Who's right?
Going by the actual index-provider data that Sharpe mentions, 31 December 2019 numbers show it as:

Stocks: $57,105,259,000,000 (FTSE Global All-Cap Stock Index)
Bonds: $42,079,040,000,000 (FTSE World Broad Investment-Grade Bond Index)

So that's 57.57% stocks, 42.43% bonds.

Interestingly, that's virtually identical to the 'everything' index, the MSCI Global Capital Markets index from way back in 2006. This would seemingly be the Sharpe-approved index to follow. Unfortunately, they stopped publicly available access to the index back in 2006.

Image
From what I've read there is a huge delta between what is investable vs what is captive for both bonds and stocks.

For example, Emerging Market Equities range from 11-15% of tradable equities (depending on how you count Korea), but if you include the non-tradable equity (e.g. state controlled shares), the number is closer to 25% market cap.
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Re: Does it matter?

Post by Seasonal » Mon Jan 13, 2020 3:00 pm

longinvest wrote:
Mon Jan 13, 2020 9:06 am
[*] Never bear too much or too little risk: Choose an appropriate stock and bond allocation. It can be a fixed allocation or a gliding allocation (changing with age).
Are you suggesting that a fixed allocation represents an unchanging level of risk?

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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Mon Jan 13, 2020 3:42 pm

watchnerd wrote:
Mon Jan 13, 2020 10:21 am
longinvest wrote:
Sun Jan 12, 2020 7:31 pm


Who's right?
Most of the sources I've read have said the global bond market is quite a bit bigger than the global stock market.

So the 57/43 number must be using some kind of filter, perhaps some kind of float adjustment.
Or they're just avoiding certain types of bonds. And Sharpe mentions that there are even two schools of thought on including govt bonds in a world market collection. Some academics say that they should be excluded, but Sharpe leans toward inclusion.

The DIY investor's allocation problem is that Barclay declines to divulge the market values ($) for their two US and international total bond indexes that Vanguard uses.

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Re: Bill Sharpe's preferred portfolio

Post by azanon » Mon Jan 13, 2020 3:53 pm

An interesting view by Bill Sharpe, but personally, I'd tweak it to be a little more reflective of views I've seen from William Bernstein, Larry Swedroe, and Annette Thau (who wrote The Bond Book); Go ahead and have the global stocks in proper proportion (I'd just use VT, and not obsess over the extra bps), but use Intermediate-Term Treasuries for bonds, thereby taking most/all your risk on the stock side.

From various studies/experts I've seen over the years, all other bonds are varying extents of less efficient (risk vs. return) than IT Treasuries, which fall in the sweet spot of the yield curve. Also, most of those "other" bonds have equity-like risks anyway, but take that risk in a less efficient manner than stocks do (meaning, if you really want more risk, just raise the % stock). And I'd suggest forget TIPS because of potential liquidity issues (at least compared to IT Treasuries), and besides, stocks are what help combat inflation.

So I'd admit VT + Global world bond should outperform VT + IT Treasuries using return only, but not risk-adjusted return.

And I agree with those that said don't always match a global portfolio because you'd be constantly buying high/selling low to adjust. Instead, just pick something close enough to the long-term global market portfolio and then never change it, and just rebalance periodically (e.g. 50% VT/ 50% IT Treasury index).

(* Note, I found Annette Thau's (and I believe Larry S. also) argument for IT Treasuries to be more compelling than W. Bernstein's argument for ST Treasuries. Yeah, ST Treasuries are even less risky, but it's in an non-optimum portion of the yield curve, so I think the extra risk is worth it, esp if it's going to be 50% of your money).

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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Mon Jan 13, 2020 4:01 pm

azanon wrote:
Mon Jan 13, 2020 3:53 pm
An interesting view by Bill Sharpe, but personally, I'd tweak it to be a little more reflective of views I've seen from William Bernstein, Larry Swedroe, and Annette Thau (who wrote The Bond Book); Go ahead and have the global stocks in proper proportion (I'd just use VT, and not obsess over the extra bps), but use Intermediate-Term Treasuries for bonds, thereby taking most/all your risk on the stock side.

From various studies/experts I've seen over the years, all other bonds are varying extents of less efficient (risk vs. return) than IT Treasuries, which fall in the sweet spot of the yield curve. Also, most of those "other" bonds have equity-like risks anyway, but take that risk in a less efficient manner than stocks do (meaning, if you really want more risk, just raise the % stock). And I'd suggest forget TIPS because of potential liquidity issues (at least compared to IT Treasuries), and besides, stocks are what help combat inflation.
Instead of pre-selecting Intermediate Treasuries, why not hold a Total Treasury Market fund, like GOVT?

Right now, it's duration is close to most intermediate funds, but you get any shifts in the market weights between long, int, and short, automatically.
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Re: Bill Sharpe's preferred portfolio

Post by azanon » Mon Jan 13, 2020 4:06 pm

watchnerd wrote:
Mon Jan 13, 2020 4:01 pm
azanon wrote:
Mon Jan 13, 2020 3:53 pm
An interesting view by Bill Sharpe, but personally, I'd tweak it to be a little more reflective of views I've seen from William Bernstein, Larry Swedroe, and Annette Thau (who wrote The Bond Book); Go ahead and have the global stocks in proper proportion (I'd just use VT, and not obsess over the extra bps), but use Intermediate-Term Treasuries for bonds, thereby taking most/all your risk on the stock side.

From various studies/experts I've seen over the years, all other bonds are varying extents of less efficient (risk vs. return) than IT Treasuries, which fall in the sweet spot of the yield curve. Also, most of those "other" bonds have equity-like risks anyway, but take that risk in a less efficient manner than stocks do (meaning, if you really want more risk, just raise the % stock). And I'd suggest forget TIPS because of potential liquidity issues (at least compared to IT Treasuries), and besides, stocks are what help combat inflation.
Instead of pre-selecting Intermediate Treasuries, why not hold a Total Treasury Market fund, like GOVT?

Right now, it's duration is close to most intermediate funds, but you get any shifts in the market weights between long, int, and short, automatically.
Because, as you say (imply), 2/3rds of the bonds it holds are outside of the sweet-spot yield curve. Having the same average duration of an IT bond fund is not the same (as good as?) all of the bonds being IT. On average, the bonds outside of the sweet spot pay a slight premium to be at one end of the curve or the other.

So I say the reverse question is the one to ask - why just settle on your duration averaging IT bonds, when you can have ALL of your bonds be IT? From a certain POV, you get some of any shift, all of the time, since you're all IT.

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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Mon Jan 13, 2020 4:24 pm

azanon wrote:
Mon Jan 13, 2020 4:06 pm


So I say the reverse question is the one to ask - why just settle on your duration averaging IT bonds, when you can have ALL of your bonds be IT? From a certain POV, you get some of any shift, all of the time, since you're all IT.
It's a philosophical question:

As individuals, do we really think we can pinpoint the sweetspot of the yield curve?

Or does the 'wisdom of crowds' offer a different point of view?

And how long will the sweetspot be where it is? Will it shift 2-5 years from now, requiring a change in bond allocation?

It basically comes down to how strong one believes in EMH.
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Re: Bill Sharpe's preferred portfolio

Post by azanon » Mon Jan 13, 2020 4:37 pm

watchnerd wrote:
Mon Jan 13, 2020 4:24 pm
azanon wrote:
Mon Jan 13, 2020 4:06 pm


So I say the reverse question is the one to ask - why just settle on your duration averaging IT bonds, when you can have ALL of your bonds be IT? From a certain POV, you get some of any shift, all of the time, since you're all IT.
It's a philosophical question:

As individuals, do we really think we can pinpoint the sweetspot of the yield curve?

Or does the 'wisdom of crowds' offer a different point of view?

And how long will the sweetspot be where it is? Will it shift 2-5 years from now, requiring a change in bond allocation?

It basically comes down to how strong one believes in EMH.
Well, speaking for myself, I'm shameless stealing that view from Annette, a proclaimed bond expert. She suggested going with IT treasuries for that reason, so I'm just trusting that the reasoning is sound. I believe Larry takes a similar view (who I also see as an expert). So I'm just trusting them! That being said, it does seem logical that there would be a premium to be on one extreme or the other of the yield curve, since no one ever knows the future direction of interest rates.

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Re: Bill Sharpe's preferred portfolio

Post by lazyday » Mon Jan 13, 2020 5:12 pm

azanon wrote:
Mon Jan 13, 2020 3:53 pm
views I've seen from William Bernstein, Larry Swedroe, and Annette Thau (who wrote The Bond Book); Go ahead and have the global stocks in proper proportion (I'd just use VT, and not obsess over the extra bps), but use Intermediate-Term Treasuries for bonds
Does anyone remember why Thau suggested only owning Treasuries?

Bernstein has written about a behavioral advantage in Treasuries. In a financial disaster, depending on very safe bonds might help prevent panic.

Swedroe has written about the historical evidence on corporates and high yield. Compared to owning a little more stock but safer bonds, neither corp or junk have improved risk adjusted returns, and in some cases reduced them.

Swensen has written about the conflict of interest between bond investors and corporations.

On the other hand, with a single fund portfolio, the behavioral benefit is reduced or lost. The future might not look like the past, and it’s often wiser to use theory and common sense instead of backtests. If prices are primarily set by institutional investors, then conflict of interest might not be an issue.

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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Mon Jan 13, 2020 5:19 pm

azanon wrote:
Mon Jan 13, 2020 4:37 pm


Well, speaking for myself, I'm shameless stealing that view from Annette, a proclaimed bond expert. She suggested going with IT treasuries for that reason, so I'm just trusting that the reasoning is sound. I believe Larry takes a similar view (who I also see as an expert). So I'm just trusting them! That being said, it does seem logical that there would be a premium to be on one extreme or the other of the yield curve, since no one ever knows the future direction of interest rates.
Nothing against either one of them, but have bond pundits proven to be any more accurate than stock market pundits?

Bill Gross, "the Bond King", certainly hasn't been.

The evidence seems to be that people cannot predict interest rate moves with any more accuracy than they can pick stock market moves.

So whatever Annette and Larry are saying might be true at this precise moment...but it will almost certainly be different in the future, especially if we're talking about asset allocations for the long haul.
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Tue Jan 14, 2020 4:50 pm

A discussion of Sharpe's market portfolio really isn't complete without considering the companion TIPS portfolio. The TIPS duration is the investor's personal choice, perhaps using IT, ST, or a combination. They're not really buckets (TIPS and market) because they're rebalanced to a percentage allocation. But the TIPS AA can be 0%, or so can the market portfolio (the special cases).

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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Tue Jan 14, 2020 4:56 pm

pascalwager wrote:
Tue Jan 14, 2020 4:50 pm
A discussion of Sharpe's market portfolio really isn't complete without considering the companion TIPS portfolio. The TIPS duration is the investor's personal choice, perhaps using IT, ST, or a combination. They're not really buckets (TIPS and market) because they're rebalanced to a percentage allocation. But the TIPS AA can be 0%, or so can the market portfolio (the special cases).
I've never heard him say they're rebalanced to percentages. I've heard it described as putting funds into the riskless portfolio for liability matching purposes according to what your advisor recommends.

You live off the 'riskless' TIPS portfolio and buy new ones with the proceeds from the 'risky' / market portfolio.

That sounds like buckets to me.

If he's evolved his thinking to something percentage-based, I've yet to see that. And even then, to pretend it's a separate "off the books" part of the AA is just mental accounting.
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Tue Jan 14, 2020 5:04 pm

watchnerd wrote:
Tue Jan 14, 2020 4:56 pm
pascalwager wrote:
Tue Jan 14, 2020 4:50 pm
A discussion of Sharpe's market portfolio really isn't complete without considering the companion TIPS portfolio. The TIPS duration is the investor's personal choice, perhaps using IT, ST, or a combination. They're not really buckets (TIPS and market) because they're rebalanced to a percentage allocation. But the TIPS AA can be 0%, or so can the market portfolio (the special cases).
I've never heard him say they're rebalanced to percentages. I've heard it described as putting funds into the riskless portfolio for liability matching purposes according to what your advisor recommends.

You live off the 'riskless' TIPS portfolio and buy new ones with the proceeds from the 'risky' / market portfolio.

That sounds like buckets to me.

If he's evolved his thinking to something percentage-based, I've yet to see that. And even then, to pretend it's a separate "off the books" part of the AA is just mental accounting.
If you check RISMAT, Section 7, you'll see a graphical 0-100% linear representation of the two combined portfolios.

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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Tue Jan 14, 2020 5:16 pm

pascalwager wrote:
Tue Jan 14, 2020 5:04 pm
watchnerd wrote:
Tue Jan 14, 2020 4:56 pm
pascalwager wrote:
Tue Jan 14, 2020 4:50 pm
A discussion of Sharpe's market portfolio really isn't complete without considering the companion TIPS portfolio. The TIPS duration is the investor's personal choice, perhaps using IT, ST, or a combination. They're not really buckets (TIPS and market) because they're rebalanced to a percentage allocation. But the TIPS AA can be 0%, or so can the market portfolio (the special cases).
I've never heard him say they're rebalanced to percentages. I've heard it described as putting funds into the riskless portfolio for liability matching purposes according to what your advisor recommends.

You live off the 'riskless' TIPS portfolio and buy new ones with the proceeds from the 'risky' / market portfolio.

That sounds like buckets to me.

If he's evolved his thinking to something percentage-based, I've yet to see that. And even then, to pretend it's a separate "off the books" part of the AA is just mental accounting.
If you check RISMAT, Section 7, you'll see a graphical 0-100% linear representation of the two combined portfolios.
I just looked at it again.

I'm not seeing a graph that (in my mind) matches what you're describing.

Which page?

https://web.stanford.edu/~wfsharpe/RISMAT/RISMAT-7.pdf
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

pascalwager
Posts: 1612
Joined: Mon Oct 31, 2011 8:36 pm

Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Tue Jan 14, 2020 9:34 pm

watchnerd wrote:
Tue Jan 14, 2020 5:16 pm
pascalwager wrote:
Tue Jan 14, 2020 5:04 pm
watchnerd wrote:
Tue Jan 14, 2020 4:56 pm
pascalwager wrote:
Tue Jan 14, 2020 4:50 pm
A discussion of Sharpe's market portfolio really isn't complete without considering the companion TIPS portfolio. The TIPS duration is the investor's personal choice, perhaps using IT, ST, or a combination. They're not really buckets (TIPS and market) because they're rebalanced to a percentage allocation. But the TIPS AA can be 0%, or so can the market portfolio (the special cases).
I've never heard him say they're rebalanced to percentages. I've heard it described as putting funds into the riskless portfolio for liability matching purposes according to what your advisor recommends.

You live off the 'riskless' TIPS portfolio and buy new ones with the proceeds from the 'risky' / market portfolio.

That sounds like buckets to me.

If he's evolved his thinking to something percentage-based, I've yet to see that. And even then, to pretend it's a separate "off the books" part of the AA is just mental accounting.
If you check RISMAT, Section 7, you'll see a graphical 0-100% linear representation of the two combined portfolios.
I just looked at it again.

I'm not seeing a graph that (in my mind) matches what you're describing.

Which page?

https://web.stanford.edu/~wfsharpe/RISMAT/RISMAT-7.pdf
Page 38: The multi-colored graph shows the the percentage of each of the five components (TIPS, US stocks, non-US stocks, US bonds, non-US bonds) for any desired percentage of TIPS.

pascalwager
Posts: 1612
Joined: Mon Oct 31, 2011 8:36 pm

Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Tue Jan 14, 2020 9:39 pm

pascalwager wrote:
Tue Jan 14, 2020 9:34 pm
watchnerd wrote:
Tue Jan 14, 2020 5:16 pm
pascalwager wrote:
Tue Jan 14, 2020 5:04 pm
watchnerd wrote:
Tue Jan 14, 2020 4:56 pm
pascalwager wrote:
Tue Jan 14, 2020 4:50 pm
A discussion of Sharpe's market portfolio really isn't complete without considering the companion TIPS portfolio. The TIPS duration is the investor's personal choice, perhaps using IT, ST, or a combination. They're not really buckets (TIPS and market) because they're rebalanced to a percentage allocation. But the TIPS AA can be 0%, or so can the market portfolio (the special cases).
I've never heard him say they're rebalanced to percentages. I've heard it described as putting funds into the riskless portfolio for liability matching purposes according to what your advisor recommends.

You live off the 'riskless' TIPS portfolio and buy new ones with the proceeds from the 'risky' / market portfolio.

That sounds like buckets to me.

If he's evolved his thinking to something percentage-based, I've yet to see that. And even then, to pretend it's a separate "off the books" part of the AA is just mental accounting.
If you check RISMAT, Section 7, you'll see a graphical 0-100% linear representation of the two combined portfolios.
I just looked at it again.

I'm not seeing a graph that (in my mind) matches what you're describing.

Which page?

https://web.stanford.edu/~wfsharpe/RISMAT/RISMAT-7.pdf
Page 38: The multi-colored graph shows the the percentage of each of the five components (TIPS, US stocks, non-US stocks, US bonds, non-US bonds) for any desired percentage of TIPS.
For June 30, 2015

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watchnerd
Posts: 2494
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Location: Seattle, WA, USA

Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Tue Jan 14, 2020 10:29 pm

pascalwager wrote:
Tue Jan 14, 2020 9:34 pm


Page 38: The multi-colored graph shows the the percentage of each of the five components (TIPS, US stocks, non-US stocks, US bonds, non-US bonds) for any desired percentage of TIPS.
That's not an asset allocation, thats just a risk comparison. And a very simplistic one at that (he calls it "rudimentary").

In other words, if I'm 40% TIPS, then my relative risk is 60% versus maximum risk (0% TIPS). Conversely, if I'm 100% TIPS, I have 0% risk (0% risky portfolio).

Aside from being fairly obvious, it's also flawed on several levels because:

1. The components of the risky portfolio don't contribute risk equally. The risk graph assumes linearity relative to capital allocated, which isn't true.

Example: in a 60% US stock/40% ITT portfolio, the risk decomposition is 93% from the stock, 7% from the bonds.

So the graph isn't even accurate for conveying risk.

2. TIPS aren't actually riskless. A portfolio that is 50% cash / 50% TIPS will get virtually all of its risk decomposition from the TIPS.

3. It gives no information on how I'm supposed to divide my money between the riskless and risky ports, unless one assumes the only criteria would be risk tolerance, which I'm sure he isn't trying to imply

4. Other than a relative weighting based on capital allocated, it has no actual measurement of total portfolio risk like one gets from MVO / Risk Parity calculations
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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