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.
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:
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.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP