Practice vs theory in portfolio strategies

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Astones
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Re: Practice vs theory in portfolio strategies

Post by Astones »

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).

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.
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Re: Practice vs theory in portfolio strategies

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Astones wrote: Sun May 02, 2021 5:24 pm
acegolfer wrote: Sun May 02, 2021 5:09 pm That's what Fama said and I agree. Under any asset pricing model that we can think of, market portfolio is efficient.
Doesn't it imply that the market portfolio will be on the intersection between frontier and tangent ?
Once we move to a multi-dimension risk model, then market portfolio is no longer the tangency portfolio for the mean-variance investor. It's explained in page 63 of https://eml.berkeley.edu/~craine/EconH1 ... _world.pdf
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Re: Practice vs theory in portfolio strategies

Post by vineviz »

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.

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Re: Practice vs theory in portfolio strategies

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vineviz wrote: Sun May 02, 2021 6:37 pm 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.
The goal of the thread is precisely that: we start from the ideal case and then we discuss how to deviate from it.
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Re: Practice vs theory in portfolio strategies

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Astones wrote: Sun May 02, 2021 7:08 pm
vineviz wrote: Sun May 02, 2021 6:37 pm 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.
The goal of the thread is precisely that: we start from the ideal case and then we discuss how to deviate from it.
Discussing plausible AAs for investors is what a great deal of this forum is all about. There are no definitive right answers but an infinite number of plausible ones.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Practice vs theory in portfolio strategies

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willthrill81 wrote: Sun May 02, 2021 7:29 pm
Discussing plausible AAs for investors is what a great deal of this forum is all about. There are no definitive right answers but an infinite number of plausible ones.
The theory is supposedly a bit more objective and the application should be where the opinions start differing, but yes, generally speaking I can agree that there's no definitive right answer.
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Re: Practice vs theory in portfolio strategies

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Astones wrote: Sun May 02, 2021 7:08 pm
vineviz wrote: Sun May 02, 2021 6:37 pm 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.
The goal of the thread is precisely that: we start from the ideal case and then we discuss how to deviate from it.
But the point is that there is no "ideal case". If anything, the market portfolio is just an "average case" in the sense that it is the weighted average of everyone's holdings.

The average height of men in the US is 5'9"", but there's no sense in which that height is ideal or a default height. It's the same with the market portfolio.
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Re: Practice vs theory in portfolio strategies

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vineviz wrote: Sun May 02, 2021 7:54 pm
The average height of men in the US is 5'9"", but there's no sense in which that height is ideal or a default height. It's the same with the market portfolio.
I'll be direct here: I believe that this analogy makes absolutely no sense whatsoever. in fact, it might be the weirdest apples with oranges comparison I have ever seen.
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Re: Practice vs theory in portfolio strategies

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Astones wrote: Sun May 02, 2021 8:05 pm
vineviz wrote: Sun May 02, 2021 7:54 pm
The average height of men in the US is 5'9"", but there's no sense in which that height is ideal or a default height. It's the same with the market portfolio.
I'll be direct here: I believe that this analogy makes absolutely no sense whatsoever. in fact, it might be the weirdest apples with oranges comparison I have ever seen.
Possibly it strikes you as weird because you're having a hard time shaking some preconception about the the nature of the market portfolio? I'm just guessing, of course, but it's an accurate analogy.

As I said, the weights of each asset in the global market portfolio is just the average of each individual investors holdings. If the ideal weight of a stock is 100% for half of investors and 0% for the other half, the market portfolio will contain that stock at a weight of 50%: for whom is 50% the "ideal" weighing? In this example, no one.
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Re: Practice vs theory in portfolio strategies

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Astones wrote: Sun May 02, 2021 8:05 pm
vineviz wrote: Sun May 02, 2021 7:54 pm
The average height of men in the US is 5'9"", but there's no sense in which that height is ideal or a default height. It's the same with the market portfolio.
I'll be direct here: I believe that this analogy makes absolutely no sense whatsoever. in fact, it might be the weirdest apples with oranges comparison I have ever seen.
I’m kinda feeling that analogy.

What even is the ideal case? Nobody here will agree on that, because it’s subjective. It’s impossible to construct or discuss the ideal case, if nobody even agrees on what that means.

I don’t know what your ideal portfolio is. But if you did, it probably wouldn’t be ideal for the majority of people. And to be honest, I’m not even sure if I could accurately determine if your ideal portfolio was ideal for me or not.

I think we all want to project out into the future. And anything that disappoints us, we will fault in hind sight. That isn’t fair, but it’s what we do....

So your ideal portfolio might even be something that proves to be terrible. No fault of yours, or the portfolio. But good luck telling people after the fact that it was ideal.
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Re: Practice vs theory in portfolio strategies

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vineviz wrote: Sun May 02, 2021 8:11 pm
As I said, the weights of each asset in the global market portfolio is just the average of each individual investors holdings. If the ideal weight of a stock is 100% for half of investors and 0% for the other half, the market portfolio will contain that stock at a weight of 50%: for whom is 50% the "ideal" weighing? In this example, no one.
You are confusing average performance with average strategy. The market portfolio will provide you with average performance but there is no doubt that it's going to be above average in the way it's positioned in the risk-return plot.
Normchad wrote: Sun May 02, 2021 8:14 pm What even is the ideal case?
The ideal case is the one that minimizes the risk for a given expected return. It's a rather well defined concept.
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Re: Practice vs theory in portfolio strategies

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How are we define “the market”? stocks and bonds?

Home country and International?

Commodities?

Crypto?

Real estate?

Collectibles?
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Re: Practice vs theory in portfolio strategies

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Astones wrote: Sun May 02, 2021 7:08 pm
vineviz wrote: Sun May 02, 2021 6:37 pm 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.
The goal of the thread is precisely that: we start from the ideal case and then we discuss how to deviate from it.
This is exactly what Fama suggests. Watch his interview: https://www.youtube.com/watch?v=dj-RO4mh-wA&t=1710s
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Re: Practice vs theory in portfolio strategies

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Normchad wrote: Sun May 02, 2021 8:32 pm How are we define “the market”? stocks and bonds?

Home country and International?

Commodities?

Crypto?

Real estate?

Collectibles?
It's a legitimate question, like many others, and yes, different people will answer differently.
I personally care only about stocks and bonds, but it's arbitrary.
acegolfer wrote: Sun May 02, 2021 8:33 pm
This is exactly what Fama suggests. Watch his interview: https://www.youtube.com/watch?v=dj-RO4mh-wA&t=1710s
thank you!
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Re: Practice vs theory in portfolio strategies

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Astones wrote: Sun May 02, 2021 8:24 pm
vineviz wrote: Sun May 02, 2021 8:11 pm
As I said, the weights of each asset in the global market portfolio is just the average of each individual investors holdings. If the ideal weight of a stock is 100% for half of investors and 0% for the other half, the market portfolio will contain that stock at a weight of 50%: for whom is 50% the "ideal" weighing? In this example, no one.
You are confusing average performance with average strategy. The market portfolio will provide you with average performance but there is no doubt that it's going to be above average in the way it's positioned in the risk-return plot.
What I’m trying to help you understand is that there is no THE risk-return plot.
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Re: Practice vs theory in portfolio strategies

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vineviz wrote: Mon May 03, 2021 5:48 am
What I’m trying to help you understand is that there is no THE risk-return plot.
I know you are, but unfortunately I'm not convinced.
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Re: Practice vs theory in portfolio strategies

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Astones wrote: Mon May 03, 2021 7:14 am
vineviz wrote: Mon May 03, 2021 5:48 am
What I’m trying to help you understand is that there is no THE risk-return plot.
I know you are, but unfortunately I'm not convinced.
If investors don't have homogenous preferences, it MUST be the case that there is not single tangency portfolio which applies to every investor. There's simply no other theoretical solution to the problem.
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Re: Practice vs theory in portfolio strategies

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vineviz wrote: Mon May 03, 2021 7:50 am
If investors don't have homogenous preferences, it MUST be the case that there is not single tangency portfolio which applies to every investor. There's simply no other theoretical solution to the problem.
I agree that this would be the conclusion, but I believe that investors are homogeneous enough in their desire to maximize their returns given their personal risk tolerance for the risk-return plot to be meaningfully used.
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Re: Practice vs theory in portfolio strategies

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Astones wrote: Mon May 03, 2021 8:12 am
vineviz wrote: Mon May 03, 2021 7:50 am
If investors don't have homogenous preferences, it MUST be the case that there is not single tangency portfolio which applies to every investor. There's simply no other theoretical solution to the problem.
I agree that this would be the conclusion, but I believe that investors are homogeneous enough in their desire to maximize their returns given their personal risk tolerance for the risk-return plot to be meaningfully used.
Not even BHs are homogeneous. We have group of BHs who think risk is measured by variance and there's a free lunch in factor diversification. They don't really care about the systematic risks that generate higher SCV returns. All they care about is increase return, lower volatility (aka mean-variance investors).
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Re: Practice vs theory in portfolio strategies

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Astones wrote: Mon May 03, 2021 8:12 am
vineviz wrote: Mon May 03, 2021 7:50 am
If investors don't have homogenous preferences, it MUST be the case that there is not single tangency portfolio which applies to every investor. There's simply no other theoretical solution to the problem.
I agree that this would be the conclusion, but I believe that investors are homogeneous enough in their desire to maximize their returns given their personal risk tolerance for the risk-return plot to be meaningfully used.
You keep saying “the risk return plot”, the point vineviz is making is that each investor may have a different x-axis variable in that plot, because their concept of risk may be different. It’s not only variance of annual returns.

If you care about variance of annual returns but I care about variance of final portfolio value, and someone else has 2 or 7 dimensions they are about, then how can you say your return-maximizing portfolio given your risk definition is also the best for me, with my totally different risk definition?
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Re: Practice vs theory in portfolio strategies

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Astones wrote: Mon May 03, 2021 8:12 am
vineviz wrote: Mon May 03, 2021 7:50 am
If investors don't have homogenous preferences, it MUST be the case that there is not single tangency portfolio which applies to every investor. There's simply no other theoretical solution to the problem.
I agree that this would be the conclusion, but I believe that investors are homogeneous enough in their desire to maximize their returns given their personal risk tolerance for the risk-return plot to be meaningfully used.
Investors are not nearly homogenous enough for them all to desire a global market cap weighted portfolio. Virtually no one holds it, and virtually no one should.

It takes some very violent handwaving, using a host of assumptions we KNOW to be false, to even get close to that conclusion.

Don't get me wrong, market-cap weighting has some practical advantages for fund management but I can't figure out the desperation to justify a global market cap weighted portfolio as universally optimal.

It's very easy to recommend something like Vanguard Total World Stock Index Fund as a reasonable equity investment for most investors without having to invent reasons to paint it as the perfect or even best[/b ]equity investment for every investor.

And never mind implication with respect to bonds.
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Re: Practice vs theory in portfolio strategies

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acegolfer wrote: Mon May 03, 2021 8:23 am
Not even BHs are homogeneous. We have group of BHs who think risk is measured by variance and there's a free lunch in factor diversification. They don't really care about the systematic risks that generate higher SCV returns. All they care about is increase return, lower volatility (aka mean-variance investors).
I never prescribed a protocol to properly estimate risk. The technique we choose to use is open to debate. I'm saying that most investors, if they could talk to God and ask for a true probability distribution of the returns for every security, they'd build a portfolio that maximizes the expected return given their preferred standard deviation (the sd of God's distribution being the risk). That said, Yes, some of them might have different tastes. I guess there will be some who just want to reduce the risk of heavy losses, there will be some who only invest in green energy, thee will be every kind of personal tastes. My belief is that these deviations are ultimately just noise and that the 2D risk-return plot is an abstraction that works well enough to discuss portfolio strategies with an analytical approach.

And it's very helpful, because it's the best visual way I could possibly think to explain this mechanism that increasing the risk by reducing diversification is suboptimal (you re not staying close to the tangent).
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Re: Practice vs theory in portfolio strategies

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vineviz wrote: Mon May 03, 2021 8:32 am
And never mind implication with respect to bonds.
If we were studying physics, I'd start explaining that we can imagine a car as a point moving at constant speed along a 1-dimensional line. What would you do? Would you immediately start saying "but cars are not points, speed keep changing, roads are not straight lines!" ?
You'd be right, but it's a helpful abstraction. You start with the ideal case and then you add all possible complications. I don't know what's so problematic about this approach.
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Re: Practice vs theory in portfolio strategies

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Astones wrote: Mon May 03, 2021 8:49 am
acegolfer wrote: Mon May 03, 2021 8:23 am
Not even BHs are homogeneous. We have group of BHs who think risk is measured by variance and there's a free lunch in factor diversification. They don't really care about the systematic risks that generate higher SCV returns. All they care about is increase return, lower volatility (aka mean-variance investors).
I never prescribed a protocol to properly estimate risk. The technique we choose to use is open to debate. I'm saying that most investors, if they could talk to God and ask for a true probability distribution of the returns for every security, they'd build a portfolio that maximizes the expected return given their preferred standard deviation (the sd of God's distribution being the risk). That said, Yes, some of them might have different tastes. I guess there will be some who just want to reduce the risk of heavy losses, there will be some who only invest in green energy, thee will be every kind of personal tastes. My belief is that these deviations are ultimately just noise and that the 2D risk-return plot is an abstraction that works well enough to discuss portfolio strategies with an analytical approach.

And it's very helpful, because it's the best visual way I could possibly think to explain this mechanism that increasing the risk by reducing diversification is suboptimal (you re not staying close to the tangent).
I agree that most investors will benefit from understanding the "modern portfolio theory", which is a 2D risk-return model developed in 60s (before EMH was introduced in 70s). Even if MPT is not the reality, they will have a better understanding of risk-return trade-off paradigm.
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Re: Practice vs theory in portfolio strategies

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acegolfer wrote: Mon May 03, 2021 9:05 am
I agree that most investors will benefit from understanding the "modern portfolio theory", which is a 2D risk-return model developed in 60s (before EMH was introduced in 70s). Even if MPT is not the reality, they will have a better understanding of risk-return trade-off paradigm.
Exactly, that's the tool I have by now. Then, well, I look forward to reading the article you suggested with the multidimensional surface and expand my understanding. I believe starting with simple things is the right way to go.
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Re: Practice vs theory in portfolio strategies

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Astones wrote: Mon May 03, 2021 9:08 am
acegolfer wrote: Mon May 03, 2021 9:05 am
I agree that most investors will benefit from understanding the "modern portfolio theory", which is a 2D risk-return model developed in 60s (before EMH was introduced in 70s). Even if MPT is not the reality, they will have a better understanding of risk-return trade-off paradigm.
Exactly, that's the tool I have by now. Then, well, I look forward to reading the article you suggested with the multidimensional surface and expand my understanding. I believe starting with simple things is the right way to go.
Let me know if you have any question about Cochrane's paper. I think less than quarter of BHs understand the paper.
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Re: Practice vs theory in portfolio strategies

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acegolfer wrote: Mon May 03, 2021 9:05 am
Astones wrote: Mon May 03, 2021 8:49 am
acegolfer wrote: Mon May 03, 2021 8:23 am
Not even BHs are homogeneous. We have group of BHs who think risk is measured by variance and there's a free lunch in factor diversification. They don't really care about the systematic risks that generate higher SCV returns. All they care about is increase return, lower volatility (aka mean-variance investors).
I never prescribed a protocol to properly estimate risk. The technique we choose to use is open to debate. I'm saying that most investors, if they could talk to God and ask for a true probability distribution of the returns for every security, they'd build a portfolio that maximizes the expected return given their preferred standard deviation (the sd of God's distribution being the risk). That said, Yes, some of them might have different tastes. I guess there will be some who just want to reduce the risk of heavy losses, there will be some who only invest in green energy, thee will be every kind of personal tastes. My belief is that these deviations are ultimately just noise and that the 2D risk-return plot is an abstraction that works well enough to discuss portfolio strategies with an analytical approach.

And it's very helpful, because it's the best visual way I could possibly think to explain this mechanism that increasing the risk by reducing diversification is suboptimal (you re not staying close to the tangent).
I agree that most investors will benefit from understanding the "modern portfolio theory", which is a 2D risk-return model developed in 60s (before EMH was introduced in 70s). Even if MPT is not the reality, they will have a better understanding of risk-return trade-off paradigm.
Yes, MPT seems to be comprehended by many BHs at least. The idea of diversification through assets that aren't perfectly correlated and are as close to uncorrelated as possible (i.e., 'owning an asset that zigs while another zags') makes sense to many. But MPT doesn't come close to suggesting that investors should all start off with a 43/57 AA and then leverage that up or down as needed.

Even so, implementing MPT may have its risks too. Larry Swedroe and others have been on a long quest for assets that would have stock-like returns but be uncorrelated or at least weakly correlated with stocks. So far, that quest has not gone well.
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Re: Practice vs theory in portfolio strategies

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Astones wrote: Mon May 03, 2021 8:49 am My belief is that these deviations are ultimately just noise and that the 2D risk-return plot is an abstraction that works well enough to discuss portfolio strategies with an analytical approach.

And it's very helpful, because it's the best visual way I could possibly think to explain this mechanism that increasing the risk by reducing diversification is suboptimal (you re not staying close to the tangent).
Using a simplistic model of the world can obviously be very useful in many situations. If you're suggesting that it can be a reasonable abstraction under certain conditions, then we definitely agree on that.

But the 2D risk-return plot is just that: a simplistic abstraction. And it is one that depends on some VERY strong assumptions, assumptions that we KNOW are not remotely true in many real-life situations.

This needs to be kept in mind, however, because sometimes the simplistic abstraction used blindly will give you the wrong intuition about a problem as I think it does here when you say " increasing the risk by reducing diversification is suboptimal (you re not staying close to the tangent)". The simplistic model in this case misdefines "risk", is incapable of properly defining "diversification", and can't distinguish "optimal" from "suboptimal" because it can't accommodate multidimensional frontiers or tangents.

You can't understand the limits of a model until you understand the model.
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Re: Practice vs theory in portfolio strategies

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Astones wrote: Sat May 01, 2021 11:31 am
From the top of my head, there are few issues that come to my mind when we actually implement the strategy in practice:

1) the most important: leverage isn't free at all. So, if someone isn't satisfied with the expected return of the alleged efficient portfolio, you can't really move smoothly along the tangent line by just borrowing money, so a case can be made that increasing the risk by rather tuning the weights differently would end up being more cost efficient. This is what people usually do: you don't really weigh according to market cap in the case of different asset classes, but usually you allocate to stocks a weight that depends on your age and your risk tolerance. Then some people do a step further and they also change the allocation among stocks through various forms of factor investing.

2) Some securities are easier to buy than others. This kind of friction, especially when we try to diversify geographically, might lead to market capitalizations that are different with respect to the ones we'd have if all securities belonged to the same market. This could also be a valid argument in favor of the Bogle portfolio, of just buying the total US market as opposed to the world market.

3) Then there is the intrinsic problem that you can't actually buy every possible asset. You'd buy a sample through ETFs, but then the larger the turnover ratio due to companies being added/removed from the index, the lower your return would be with respect of having, yes, fewer companies, but with the certainty that those companies will remain the same over time.

Don't hesitate to add more practical issues that you believe would be present if we try to apply the theory under the efficient market hypothesis.

These are all valid differences between reality and theory with regards to the Sharpe 'total market' portfolio approach.

However, all the typical remedies, such as increasing stocks instead of using leverage to increase risk/returns, have their own downsides, in theory, too.
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Re: Practice vs theory in portfolio strategies

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Random Walker wrote: Sat May 01, 2021 12:20 pm I like the idea of moving towards risk parity: diversify away from the factor that dominates most all our portfolios, the market factor. I believe in diversifying across geography, factors, styles, even alternatives. The best and cheapest source of diversification is high quality bonds. Everything else down the diversification/portfolio efficiency path involves decreased marginal benefit and increased marginal cost. Each investor needs to decide where to draw the line. For me that’s where theory meets reality. Personally, I’ve sort of gone all in on the theory side of things. Over the last decade, I would have done substantially better following Bogle’s Cost Matters Hypothesis and the remainder of his advice. We’ll see what the next decade brings.

Dave
For a long time, I had a conflict in portfolio priorities between:

Bonds (Treasuries) as Risk Free Asset vs Bonds as Risk Asset

After the recent run up, our total portfolio size is such that we no longer have to pick, so we're funding both:

Total Port = RP + LMP

LMP = Bonds as Risk Free Asset (US Treasuries / TIPS)

Risk Portfolio = Bonds as Risk Asset (total world bond)


This is as close as I can feasibly get to Sharpe's lockboxes absent the existence of zero coupon TIPS and "m shares".
Last edited by watchnerd on Mon May 03, 2021 10:33 am, edited 1 time in total.
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Re: Practice vs theory in portfolio strategies

Post by Astones »

willthrill81 wrote: Mon May 03, 2021 10:01 am
Yes, MPT seems to be comprehended by many BHs at least. The idea of diversification through assets that aren't perfectly correlated and are as close to uncorrelated as possible (i.e., 'owning an asset that zigs while another zags') makes sense to many. But MPT doesn't come close to suggesting that investors should all start off with a 43/57 AA and then leverage that up or down as needed.
If leverage were free I think I would actually do just that.
Buy VT and a world bond ETF and then increase the expected return and risk with leverage.

Then, given the cost of borrowing, I don't really know what to do.
watchnerd wrote: Mon May 03, 2021 10:23 am However, all the typical remedies, such as increasing stocks instead of using leverage to increase risk/returns, have their own downsides, in theory, too.
I agree.
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Re: Practice vs theory in portfolio strategies

Post by watchnerd »

Astones wrote: Mon May 03, 2021 10:31 am
If leverage were free I think I would actually do just that.
Buy VT and a world bond ETF and then increase the expected return and risk with leverage.

Then, given the cost of borrowing, I don't really know what to do.
The next, cheap option is to just increase your capital at risk.

That's not quite the same as increasing capital efficiency via leverage, but it works.

We put 45% of our pre-tax income into the market portfolio.

Thus, we're in effect, taking more risk.
60% Global Market Stocks (VT,FM) | 38% Global Market Bonds | 2% Alts || LMP TIPS/STRIPS || RSU + ESPP
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Astones
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Re: Practice vs theory in portfolio strategies

Post by Astones »

watchnerd wrote: Mon May 03, 2021 11:12 am
Astones wrote: Mon May 03, 2021 10:31 am
If leverage were free I think I would actually do just that.
Buy VT and a world bond ETF and then increase the expected return and risk with leverage.

Then, given the cost of borrowing, I don't really know what to do.
The next, cheap option is to just increase your capital at risk.

That's not quite the same as increasing capital efficiency via leverage, but it works.

We put 45% of our pre-tax income into the market portfolio.

Thus, we're in effect, taking more risk.
Yes, so this kind of comparisons are what I'm interested in.
Practically, it's very likely that decreasing the bond allocation is a good idea, when you're young.
And I'll likely do just that.

An interesting question is whether over-weighing EM and SC, or rather just leveraging VT, depending on the cost of borrowing.
I don't have an answer.
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