Astones wrote: ↑Sun May 02, 2021 5:55 pm
vineviz wrote: ↑Sun May 02, 2021 5:43 pm
This is where theory uncouples from practice: who can both borrow and lend at the risk free rate?

If the bonds you have are close to the ideal risk-free rate, then of course we are talking about simply reducing their allocation directly. The way I see it, you build a market cap weighted portfolio with stocks+every relatively risky bond, and then the allocation to the risk-free bonds should let you move along the tangent (theoretically, under all the assumptions we made).

For one thing, that's a big "if" and we're already making a lot of counterfactual assumptions just to get the market portfolio to be kind-of sort-of optimal for some investors.

Astones wrote: ↑Sun May 02, 2021 5:55 pm
vineviz wrote: ↑Sun May 02, 2021 5:43 pm
And even here, it’s almost certainly not the global market weight portfolio that is the tangency portfolio for you.

But to the extent the market is efficient, it should be. Not only for me, but for everyone.

Only if all investors are identical in every respect: identical loss aversion, identical uncertainty aversion, identical preferences, identical taxation regimes, identical regulatory environments, identical investment horizon, etc.

If investors differ on any of these dimensions, then all bets are off. The market portfolio is the weighted average of

**all investors**, but might very well not be the optimal portfolio for any investors.

Imagine a stylized world in which there are only two groups of investors, each with preferences that limit them to just two investable securities. The first group has an efficient frontier which includes Vanguard Short-Term Treasury Inv (VFISX) and Vanguard Long-Term Investment-Grade Inv (VWESX). The second group has an efficient frontier which includes Vanguard Long-Term Treasury Inv (VUSTX) and Vanguard Growth Index Investor (VIGRX).

Each group has a single tangency portfolio, but if the two groups have equal amounts of capital the market portfolio (which is just the weighted average of the two portfolios) is literally optimal for no one.

"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch