Bill Sharpe's preferred portfolio

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watchnerd
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Wed Jan 15, 2020 12:47 am

pascalwager wrote:
Tue Jan 14, 2020 9:39 pm


For June 30, 2015
Right, which means it's not really correct 5 years later given the market port shifts over time.

You don't need a multicolor graph to say:

'Pick your TIPS allocation at whatever level you like. Put the rest of your funds in the market portfolio'.

Which is what he has said, verbally in YouTube interviews and all that graph is really showing given the market portfolio is fluid over time.
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Wed Jan 15, 2020 3:05 am

watchnerd wrote:
Wed Jan 15, 2020 12:47 am
pascalwager wrote:
Tue Jan 14, 2020 9:39 pm


For June 30, 2015
Right, which means it's not really correct 5 years later given the market port shifts over time.

The market portfolio changes every day.

You don't need a multicolor graph to say:

'Pick your TIPS allocation at whatever level you like. Put the rest of your funds in the market portfolio'.2

It's saying versus showing.

Which is what he has said, verbally in YouTube interviews and all that graph is really showing given the market portfolio is fluid over time.
Sharpe is attributing risk in a simple way. TIPS are riskless because they don't have default or inflation risk. The market portfolio is risky because it contains stocks and corporate bonds and non-inflation protected sovereign bonds. Bernstein and Edesess and others do likewise.

The only reason I referred to the graph is because you didn't believe that Sharpe intended for the TIPS to be allocated based on percentage (of TIPS and market portfolio) and regularly rebalanced.

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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Wed Jan 15, 2020 3:30 am

pascalwager wrote:
Wed Jan 15, 2020 3:05 am

Sharpe is attributing risk in a simple way. TIPS are riskless because they don't have default or inflation risk. The market portfolio is risky because it contains stocks and corporate bonds and non-inflation protected sovereign bonds. Bernstein and Edesess and others do likewise.

The only reason I referred to the graph is because you didn't believe that Sharpe intended for the TIPS to be allocated based on percentage (of TIPS and market portfolio) and regularly rebalanced.
Fair enough.

But I still find it all pretty underwhelming, given his track record, basically:

1. Hold market weight in stocks.

A fair number of BHers seem to do it independent of Sharpe.

2. Hold market weight in bonds, including international.

Jury is out on if this is really optimal, but Vanguard seems to be moving in that direction.

3. Combination of #1 + #2 = ~60/40 port

That's comforting, but given all the other research that takes the ubiquitous 60/40 as the baseline for 'balanced', it's just icing on the cake for that AA.

4. Have a riskless LMP portfolio in TIPS

Also not conceptually new. Whether it counted as 'bucket investing' our not depends on if one is allowed to balance out of riskless into risky.


It's all pretty common stuff that has been discussed by others, elsewhere.

I don't mean to sound mean, but I expected something more from a guy that has a Nobel prize.
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DB2
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Re: Bill Sharpe's preferred portfolio

Post by DB2 » Wed Jan 15, 2020 9:42 am

watchnerd wrote:
Wed Jan 15, 2020 3:30 am

I don't mean to sound mean, but I expected something more from a guy that has a Nobel prize.
What else do you expect? There's not much more to it all when it comes down to it (unless one buys into the smart alpha, momentum, etc.) It's like someone saying, "Jack Bogle was brilliant. He started Vanguard and created the index in a time where it was inconceivable given the industry mindset. You mean he only recommends two or at the most three stinking index funds to hold forever while adjusting an AA? That's it?! I expected more from such a smart guy, sheesh."

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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Wed Jan 15, 2020 10:53 am

DB2 wrote:
Wed Jan 15, 2020 9:42 am


What else do you expect? There's not much more to it all when it comes down to it (unless one buys into the smart alpha, momentum, etc.) It's like someone saying, "Jack Bogle was brilliant. He started Vanguard and created the index in a time where it was inconceivable given the industry mindset. You mean he only recommends two or at the most three stinking index funds to hold forever while adjusting an AA? That's it?! I expected more from such a smart guy, sheesh."
Say: "Nothing more needs to be said"

Reading all the RISMAT stuff is just a re-hash of known ideas.

There is value in collecting it all, but a task more suitable to a writer of popular books for the layman.
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Re: Bill Sharpe's preferred portfolio

Post by palanzo » Wed Jan 15, 2020 1:20 pm

watchnerd wrote:
Wed Jan 15, 2020 3:30 am
pascalwager wrote:
Wed Jan 15, 2020 3:05 am

Sharpe is attributing risk in a simple way. TIPS are riskless because they don't have default or inflation risk. The market portfolio is risky because it contains stocks and corporate bonds and non-inflation protected sovereign bonds. Bernstein and Edesess and others do likewise.

The only reason I referred to the graph is because you didn't believe that Sharpe intended for the TIPS to be allocated based on percentage (of TIPS and market portfolio) and regularly rebalanced.
Fair enough.

But I still find it all pretty underwhelming, given his track record, basically:

1. Hold market weight in stocks.

A fair number of BHers seem to do it independent of Sharpe.

2. Hold market weight in bonds, including international.

Jury is out on if this is really optimal, but Vanguard seems to be moving in that direction.

3. Combination of #1 + #2 = ~60/40 port

That's comforting, but given all the other research that takes the ubiquitous 60/40 as the baseline for 'balanced', it's just icing on the cake for that AA.

4. Have a riskless LMP portfolio in TIPS

Also not conceptually new. Whether it counted as 'bucket investing' our not depends on if one is allowed to balance out of riskless into risky.


It's all pretty common stuff that has been discussed by others, elsewhere.

I don't mean to sound mean, but I expected something more from a guy that has a Nobel prize.
Nice summary.

Why would one need to balance out of riskless LMP into risky? With 40 bonds those will provide sufficient funds to rebalance to 60/40 during a downturn.

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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Wed Jan 15, 2020 1:29 pm

palanzo wrote:
Wed Jan 15, 2020 1:20 pm


Nice summary.

Why would one need to balance out of riskless LMP into risky? With 40 bonds those will provide sufficient funds to rebalance to 60/40 during a downturn.
Because otherwise you're using a bucket approach, which has a higher SWR failure rate according to the Estrada paper.

That being said, there comes a point where if the COL:portfolio size multiple is high enough (say, 40x), it probably doesn't matter.
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Re: Bill Sharpe's preferred portfolio

Post by palanzo » Wed Jan 15, 2020 2:13 pm

watchnerd wrote:
Wed Jan 15, 2020 1:29 pm
palanzo wrote:
Wed Jan 15, 2020 1:20 pm


Nice summary.

Why would one need to balance out of riskless LMP into risky? With 40 bonds those will provide sufficient funds to rebalance to 60/40 during a downturn.
Because otherwise you're using a bucket approach, which has a higher SWR failure rate according to the Estrada paper.

That being said, there comes a point where if the COL:portfolio size multiple is high enough (say, 40x), it probably doesn't matter.
My reading of the Estrada paper is that when he models the bucket approach he uses two buckets. Bucket one is bills and bucket 2 is stocks. Of course this underperforms static allocations.

What he does not do is model bucket one as cash equivalents and bucket two as 60/40 as we are discussing above. Perhaps I have misread his paper but as I mentioned in a previous post on Estrada I don't agree with his approach and assumptions.

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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Wed Jan 15, 2020 2:46 pm

palanzo wrote:
Wed Jan 15, 2020 2:13 pm


My reading of the Estrada paper is that when he models the bucket approach he uses two buckets. Bucket one is bills and bucket 2 is stocks. Of course this underperforms static allocations.

What he does not do is model bucket one as cash equivalents and bucket two as 60/40 as we are discussing above. Perhaps I have misread his paper but as I mentioned in a previous post on Estrada I don't agree with his approach and assumptions.
The devils are definitely in the details.

Here's the hole I find in Sharpe's concept -- without knowing the relative size of the risky portfolio vs riskless, you don't know if the risky portfolio will generate enough returns to refresh the riskless side.

And by defining 'risky' as stocks + bonds, you're putting a drag on the risk portfolio.

Example:

1,000,000 to allocate.

1. 50% in riskless = $500k in TIPS
2. 50% in risky = $500k in 60/40

Weighted, that gives me:

TIPS = 50% of port
Risky Bonds = 20% of port
Stocks = 30% of port

Total: 30% stocks / 70% bonds

You can call it whatever you want, do mental accounting to call one side 'riskless' and the other side 'risky', but that's what you have.

Whether a 30/70 portfolio has good enough returns to support your retirement needs will vary immensely, but...

1. Calling it what it truly is (30/70) is going to make planning a lot easier when it comes using retirement planning calculators

2. Figuring out withdrawal patterns is a lot easier if you do it in aggregate for the whole port, per the usual methods. And if you're going to use something like variable withdrawals on the whole port, why bother with the mental risky vs riskless accounting?

3. True risk management is a lot more accurate if you view it aggregate. Using the above allocations:

Risk Decomposition:

Riskless:
31.32%: TIPS
Risky:
6.49%: Global Bonds (USD Hedged)
27.04%: US Stock Market
35.16%: Global ex-US Stock Market

https://www.portfoliovisualizer.com/bac ... tion4_1=15


That reality is obscured by the 'risky' vs 'riskless' mental accounting.


4. If the argument in favor of holding the global market weights in everything is that it avoids having to choose how to tilt, the question of what % of total assets should be allocated to TIPS removes that. Doing so *does* require an active decision, a tilt, and thus undermines the whole premise to begin with.

In the above example, a 30/70 port is *not* the global market weight port, no matter how much you might take comfort in pretending that part of it is.
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palanzo
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Re: Bill Sharpe's preferred portfolio

Post by palanzo » Wed Jan 15, 2020 3:34 pm

watchnerd wrote:
Wed Jan 15, 2020 2:46 pm
palanzo wrote:
Wed Jan 15, 2020 2:13 pm


My reading of the Estrada paper is that when he models the bucket approach he uses two buckets. Bucket one is bills and bucket 2 is stocks. Of course this underperforms static allocations.

What he does not do is model bucket one as cash equivalents and bucket two as 60/40 as we are discussing above. Perhaps I have misread his paper but as I mentioned in a previous post on Estrada I don't agree with his approach and assumptions.
The devils are definitely in the details.

Here's the hole I find in Sharpe's concept -- without knowing the relative size of the risky portfolio vs riskless, you don't know if the risky portfolio will generate enough returns to refresh the riskless side.

And by defining 'risky' as stocks + bonds, you're putting a drag on the risk portfolio.

Example:

1,000,000 to allocate.

1. 50% in riskless = $500k in TIPS
2. 50% in risky = $500k in 60/40

Weighted, that gives me:

TIPS = 50% of port
Risky Bonds = 20% of port
Stocks = 30% of port

Total: 30% stocks / 70% bonds

You can call it whatever you want, do mental accounting to call one side 'riskless' and the other side 'risky', but that's what you have.

Whether a 30/70 portfolio has good enough returns to support your retirement needs will vary immensely, but...

1. Calling it what it truly is (30/70) is going to make planning a lot easier when it comes using retirement planning calculators

2. Figuring out withdrawal patterns is a lot easier if you do it in aggregate for the whole port, per the usual methods. And if you're going to use something like variable withdrawals on the whole port, why bother with the mental risky vs riskless accounting?

3. True risk management is a lot more accurate if you view it aggregate. Using the above allocations:

Risk Decomposition:

Riskless:
31.32%: TIPS
Risky:
6.49%: Global Bonds (USD Hedged)
27.04%: US Stock Market
35.16%: Global ex-US Stock Market

https://www.portfoliovisualizer.com/bac ... tion4_1=15


That reality is obscured by the 'risky' vs 'riskless' mental accounting.


4. If the argument in favor of holding the global market weights in everything is that it avoids having to choose how to tilt, the question of what % of total assets should be allocated to TIPS removes that. Doing so *does* require an active decision, a tilt, and thus undermines the whole premise to begin with.

In the above example, a 30/70 port is *not* the global market weight port, no matter how much you might take comfort in pretending that part of it is.
I agree with all your points. The TIPS represent about 12 years of withdrawals at 4%. Personally I would not keep so much in the LMP although others might. If one models an overall 60/40 allocation with a TIPS LMP then the risk profile is not as bad as you have shown.

Estrada was talking about Bucket one representing 1-5 years of withdrawals. As you say, the devil is definitely in the details.

Personally I am staying with a market weight 60/40 portfolio.

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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Wed Jan 15, 2020 3:43 pm

palanzo wrote:
Wed Jan 15, 2020 3:34 pm


I agree with all your points. The TIPS represent about 12 years of withdrawals at 4%. Personally I would not keep so much in the LMP although others might. If one models an overall 60/40 allocation with a TIPS LMP then the risk profile is not as bad as you have shown.

Estrada was talking about Bucket one representing 1-5 years of withdrawals. As you say, the devil is definitely in the details.

Personally I am staying with a market weight 60/40 portfolio.

I'm 70/30 now. My equities are market weight. I'll probably move to 60/40 in about 2 years.

Personally, I'm just going to count my LMP as part of the 40% bonds.

We already do this, as we have a short TIPS / cash allocation as part of our bond allocation.
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palanzo
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Re: Bill Sharpe's preferred portfolio

Post by palanzo » Wed Jan 15, 2020 4:01 pm

watchnerd wrote:
Wed Jan 15, 2020 3:43 pm
palanzo wrote:
Wed Jan 15, 2020 3:34 pm


I agree with all your points. The TIPS represent about 12 years of withdrawals at 4%. Personally I would not keep so much in the LMP although others might. If one models an overall 60/40 allocation with a TIPS LMP then the risk profile is not as bad as you have shown.

Estrada was talking about Bucket one representing 1-5 years of withdrawals. As you say, the devil is definitely in the details.

Personally I am staying with a market weight 60/40 portfolio.

I'm 70/30 now. My equities are market weight. I'll probably move to 60/40 in about 2 years.

Personally, I'm just going to count my LMP as part of the 40% bonds.

We already do this, as we have a short TIPS / cash allocation as part of our bond allocation.
Likewise. I count my LMP as part of the 40% bonds. Do you hold the short TIPS in taxable?

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Re: Bill Sharpe's preferred portfolio

Post by pascalwager » Wed Jan 15, 2020 4:06 pm

I don't find Sharpe referring to the TIPS portfolio as an LMP. It just seems to be an overall risk reduction component that includes inflation risk reduction. Also, Sharpe is only targeting "many retirees", not younger investors.

And anyone is free to put all of their retiree savings into the high-performing T. Rowe Price New Horizons Fund (small/mid growth) which one former BH member actually did back in 2012 (he didn't like cash or bonds because of inflation risk and low-yields).

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Re: Bill Sharpe's preferred portfolio

Post by watchnerd » Wed Jan 15, 2020 4:17 pm

pascalwager wrote:
Wed Jan 15, 2020 4:06 pm
I don't find Sharpe referring to the TIPS portfolio as an LMP. It just seems to be an overall risk reduction component that includes inflation risk reduction.
I think it's completely open to interpretation what the TIPS part is.

He basically punts on the question and said 'TBD between you and your advisor'.

If the advisor likes LMP, it will probably be LMP oriented. If not, it would be smaller, just a 'buffer'.
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