Bill Sharpe's preferred portfolio

[Taylor Larimore]

Bogleheads:

We can learn from William Sharpe who wrote:

I was dead wrong about rebalancing between WBS and TIPS.

How often do Bogleheads admit being wrong? Not very often.

If Nobel Laureate, William Sharpe can be wrong and admit it, we should be able to do the same -- and become better investors.

Best wishes
Taylor

Jack Bogle's Words of Wisdom: "Most of the mistakes I've made during my long career came on those occasions, happily rare, when I removed my investment hat and put on a marketing hat."

[GaryA505]

What does WBS mean?

[trallium]

What does WBS mean?

I think it refers to this: https://www.bogleheads.org/wiki/World_B ... _Portfolio

[djm2001]

What does WBS mean?

WBS refers to Sharpe's World Bond Stock portfolio.

We can learn from William Sharpe who wrote:

I was dead wrong about rebalancing between WBS and TIPS.

How often do Bogleheads admit being wrong? Not very often.

If Nobel Laureate, William Sharpe can be wrong and admit it, we should be able to do the same -- and become better investors.

Taylor, I believe this misinterpreted pascalwager's post here. Sharpe did not say he was wrong. Rather, pascalwager said that they (pascalwager) were wrong about their interpretation of Sharpe's advice. The way that post was written was a little confusing with the blue inlining.

[pascalwager]

What does WBS mean?

WBS refers to Sharpe's World Bond Stock portfolio.

We can learn from William Sharpe who wrote:

I was dead wrong about rebalancing between WBS and TIPS.

How often do Bogleheads admit being wrong? Not very often.

If Nobel Laureate, William Sharpe can be wrong and admit it, we should be able to do the same -- and become better investors.

Taylor, I believe this misinterpreted pascalwager's post here. Sharpe did not say he was wrong. Rather, pascalwager said that they (pascalwager) were wrong about their interpretation of Sharpe's advice. The way that post was written was a little confusing with the blue inlining.

Just saw this. You're correct in your reply to Taylor. No prize need be returned to a certain committee in Sweden.

[Taylor Larimore]

pascalwager/djm2001:

I was wrong.

Taylor

Jack Bogle's Words of WIsdom: "Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense."

[pascalwager]

Since I'm here, I'll update on my own use of RISMAT.

Ultimately, I'm only using the stock portion of WBS. When you add a lot of TIPS on the sideline, you end up with too much fixed-income to suit me, so I've eliminated the two total bond funds (US and non-US). I'm doing duration-matching and striving for at least 70% TIPS (% of fixed-income). The remainder is a short-term nominal bond fund. (In actual fact, I've only achieved 55% TIPS due to account limitations.)

My target is 60/40 stocks/fixed-income and my actual allocations are as follows:

WBS stocks: 34%
Pre-existing global value/EM stocks* in taxable: 27%
Fixed-income: 40%

It's not theoretically efficient, but I think I can live with it (literally).

*Large value, small value, intl small value (AVDV), and emerging markets ex-China (XCEM)

[Logan Roy]

Since I'm here, I'll update on my own use of RISMAT.

Ultimately, I'm only using the stock portion of WBS. When you add a lot of TIPS on the sideline, you end up with too much fixed-income to suit me, so I've eliminated the two total bond funds (US and non-US). I'm doing duration-matching and striving for at least 70% TIPS (% of fixed-income). The remainder is a short-term nominal bond fund. (In actual fact, I've only achieved 55% TIPS due to account limitations.)

My target is 60/40 stocks/fixed-income and my actual allocations are as follows:

WBS stocks: 34%
Pre-existing global value/EM stocks* in taxable: 27%
Fixed-income: 40%

It's not theoretically efficient, but I think I can live with it (literally).

*Large value, small value, intl small value (AVDV), and emerging markets ex-China (XCEM)

I like overweighting TIPS. I've been looking into ways to hedge TIPS duration risk efficiently, and you may have already discovered that a value tilt is quite good for this – as rates rising tends to be good for financials, bad for bonds. Or an allocation to a Financials ETF. I also think gold works quite well on the other side, as gold tends to do well when dollar's falling (rates often receding) so it has some degree of deflation protection. You can come up with some pretty efficient portfolios using value tilts, gold and TIPS. I don't really use any other kinds of bonds.

[pascalwager]

Since I'm here, I'll update on my own use of RISMAT.

Ultimately, I'm only using the stock portion of WBS. When you add a lot of TIPS on the sideline, you end up with too much fixed-income to suit me, so I've eliminated the two total bond funds (US and non-US). I'm doing duration-matching and striving for at least 70% TIPS (% of fixed-income). The remainder is a short-term nominal bond fund. (In actual fact, I've only achieved 55% TIPS due to account limitations.)

My target is 60/40 stocks/fixed-income and my actual allocations are as follows:

WBS stocks: 34%
Pre-existing global value/EM stocks* in taxable: 27%
Fixed-income: 40%

It's not theoretically efficient, but I think I can live with it (literally).

*Large value, small value, intl small value (AVDV), and emerging markets ex-China (XCEM)

I like overweighting TIPS. I've been looking into ways to hedge TIPS duration risk efficiently, and you may have already discovered that a value tilt is quite good for this – as rates rising tends to be good for financials, bad for bonds. Or an allocation to a Financials ETF. I also think gold works quite well on the other side, as gold tends to do well when dollar's falling (rates often receding) so it has some degree of deflation protection. You can come up with some pretty efficient portfolios using value tilts, gold and TIPS. I don't really use any other kinds of bonds.

OK, then you provide some rationale for my DFA large value fund, which I've held for 27 years. As for TIPS, I would be fine with 100% of fixed-income.

[longinvest]

This post documents the monthly return and asset class weights as of May 31, 2022 of the (free-float) Global Stock-and-Bond Portfolio or, if you prefer, William Sharpe's Market Portfolio. Here's a link to the previous entry.

The May 2022 return was:

• Global Stock-and-Bond Portfolio: ((61.03% X 0.50% (global stocks)) + (38.97% X 0.08% (global bonds))) = 0.34% (USD)
  
  • Global stocks: Vanguard Total World Stock ETF (VT) NAV return
  • Global bonds: Vanguard Total World Bond ETF (BNDW) NAV return

As of May 31, 2022 the weights were:

• Global stocks: $68,424,342 million USD Market cap -- 60.79%
  
  • FTSE Global All Cap Index (GEISLMS) -- Net MCap
• Global bonds: $44,131,620 million USD Market cap -- 39.21%
  
  • FTSE World Broad Investment-Grade Bond Index (WBIG) -- Market Value

For practical investing purpose, I think that the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is a close-enough approximation of the Global Stock-and-Bond Portfolio with a moderate home bias justified by the slightly higher risks (political, etc.) and costs of foreign investing. Conveniently, it can be used as a One-Fund Portfolio. Its May 2022 return was 0.34%.

Here's a growth chart of the Global Stock-and-Bond Portfolio (and Vanguard's LifeStrategy Moderate Growth Fund (VSMGX)) from December 31, 2020 to May 31, 2022:

[AE81]

Unless I am mistaken, the end of May weightings add up to 101%. ???

Love the thread BTW!

[GaryA505]

Unless I am mistaken, the end of May weightings add up to 101%. ???

Love the thread BTW!

Inflation!

[longinvest]

Unless I am mistaken, the end of May weightings add up to 101%. ???

AE81, thanks for catching that. It was a copying mistake. My spreadsheet effectively contains 60.79% for stocks (not 61.79%). The percentage can easily be verified: ($68,424,342 / ($68,424,342+ $44,131,620)) = 60.79%. I've fixed my post.

[pascalwager]

I've further departed from Sharpe's WBS. I downsized on Total International: only 20% now, and I probably won't rebalance--up or down.

• For me, the universal presence of home-bias invalidates market-weighted Total World allocations.

• I've lost any taste for non-US investing for many reasons.

[steve r]

I've further departed from Sharpe's WBS. I downsized on Total International: only 20% now, and I probably won't rebalance--up or down.

• For me, the universal presence of home-bias invalidates market-weighted Total World allocations.

• I've lost any taste for non-US investing for many reasons.

Very interesting.
Thanks for sharing.

[longinvest]

This post documents the monthly return and asset class weights as of June 30, 2022 of the (free-float) Global Stock-and-Bond Portfolio or, if you prefer, William Sharpe's Market Portfolio. Here's a link to the previous entry.

The June 2022 return was:

• Global Stock-and-Bond Portfolio: ((60.79% X -8.35% (global stocks)) + (39.21% X -1.70% (global bonds))) = -5.74% (USD)
  
  • Global stocks: Vanguard Total World Stock ETF (VT) NAV return
  • Global bonds: Vanguard Total World Bond ETF (BNDW) NAV return

As of June 30, 2022 the weights were:

• Global stocks: $62,522,624 million USD Market cap -- 59.33%
  
  • FTSE Global All Cap Index (GEISLMS) -- Net MCap
• Global bonds: $42,863,920 million USD Market cap -- 40.67%
  
  • FTSE World Broad Investment-Grade Bond Index (WBIG) -- Market Value

For practical investing purpose, I think that the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is a close-enough approximation of the Global Stock-and-Bond Portfolio with a moderate home bias justified by the slightly higher risks (political, etc.) and costs of foreign investing. Conveniently, it can be used as a One-Fund Portfolio. Its June 2022 return was -5.67%.

Here's a growth chart of the Global Stock-and-Bond Portfolio (and Vanguard's LifeStrategy Moderate Growth Fund (VSMGX)) from December 31, 2020 to June 30, 2022:

[qub]

How would you go about adding more risk to the WBS portfolio? Hold a constant tilt? Or maybe multiply the market weight of stocks by a given number (*1.3 for example)?

[djm2001]

Where an investor should take risk depends on their personal circumstances (e.g., their employment sector and compensation, there mortgage and other debt, their upcoming expenses). They should add risks to which they are intrinsically (i.e., outside their investment portfolio) under-exposed, and should reduce exposure to risks that they already hold outside their portfolio.

For example, if an investor has a very stable salaried job with lots of reliable fixed income in their future, they can decrease their investment exposure to fixed income assets. This is the rationale behind the common advice to start with higher exposure to stocks when you're young and then add exposure to bonds over time. Here's a concrete approach to this.

On the other hand, if most of an investor's income is from equity compensation (e.g., restricted stock units of their company), then they should reduce their exposure to stocks (and in particular, the stocks with which they are getting paid) instead of to bonds.

While there's no one-size-fits-all answer, the popular knobs are the the stock/bond ratio and leverage.

[aj76er]

How would you go about adding more risk to the WBS portfolio? Hold a constant tilt? Or maybe multiply the market weight of stocks by a given number (*1.3 for example)?

You could take a look at William Sharpe’s “adaptive asset allocation” methodology, in which the ratio of stocks-to-bonds can change but is still guided by market proportions. You can find more information here:

https://www.bogleheads.org/wiki/World_B ... Allocation

To learn more, see the white paper linked in the references section.

[longinvest]

This post documents the monthly return and asset class weights as of July 31, 2022 of the (free-float) Global Stock-and-Bond Portfolio or, if you prefer, William Sharpe's Market Portfolio. Here's a link to the previous entry.

The July 2022 return was:

• Global Stock-and-Bond Portfolio: ((59.33% X 7.04% (global stocks)) + (40.67% X 2.79% (global bonds))) = 5.31% (USD)
  
  • Global stocks: Vanguard Total World Stock ETF (VT) NAV return
  • Global bonds: Vanguard Total World Bond ETF (BNDW) NAV return

As of July 31, 2022 the weights were:

• Global stocks: $66,790,193 million USD Market cap -- 60.26%
  
  • FTSE Global All Cap Index (GEISLMS) -- Net MCap
• Global bonds: $44,043,600 million USD Market cap -- 39.74%
  
  • FTSE World Broad Investment-Grade Bond Index (WBIG) -- Market Value

For practical investing purpose, I think that the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is a close-enough approximation of the Global Stock-and-Bond Portfolio with a moderate home bias justified by the slightly higher risks (political, etc.) and costs of foreign investing. Conveniently, it can be used as a One-Fund Portfolio. Its July 2022 return was 5.28%.

Here's a growth chart of the Global Stock-and-Bond Portfolio (and Vanguard's LifeStrategy Moderate Growth Fund (VSMGX)) from December 31, 2020 to July 31, 2022:

[invest2bfree]

This post documents the monthly return and asset class weights as of July 31, 2022 of the (free-float) Global Stock-and-Bond Portfolio or, if you prefer, William Sharpe's Market Portfolio. Here's a link to the previous entry.

The July 2022 return was:

• Global Stock-and-Bond Portfolio: ((59.33% X 7.04% (global stocks)) + (40.67% X 2.79% (global bonds))) = 5.31% (USD)
  
  • Global stocks: Vanguard Total World Stock ETF (VT) NAV return
  • Global bonds: Vanguard Total World Bond ETF (BNDW) NAV return

As of July 31, 2022 the weights were:

• Global stocks: $66,790,193 million USD Market cap -- 60.26%
  
  • FTSE Global All Cap Index (GEISLMS) -- Net MCap
• Global bonds: $44,043,600 million USD Market cap -- 39.74%
  
  • FTSE World Broad Investment-Grade Bond Index (WBIG) -- Market Value

For practical investing purpose, I think that the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is a close-enough approximation of the Global Stock-and-Bond Portfolio with a moderate home bias justified by the slightly higher risks (political, etc.) and costs of foreign investing. Conveniently, it can be used as a One-Fund Portfolio. Its July 2022 return was 5.28%.

Here's a growth chart of the Global Stock-and-Bond Portfolio (and Vanguard's LifeStrategy Moderate Growth Fund (VSMGX)) from December 31, 2020 to July 31, 2022:

I like this portfolio and use it for my stock portion but do not like the bond portion.

I want reasonable returns for every dollar I invest and I donot agree with bnd which has 2/3rd treasuries, it barely covers inflation.

I

[longinvest]

This post documents the monthly return and asset class weights as of August 31, 2022 of the (free-float) Global Stock-and-Bond Portfolio or, if you prefer, William Sharpe's Market Portfolio. Here's a link to the previous entry.

The August 2022 return was:

• Global Stock-and-Bond Portfolio: ((60.26% X -3.91% (global stocks)) + (39.74% X -3.18% (global bonds))) = -3.63% (USD)
  
  • Global stocks: Vanguard Total World Stock ETF (VT) NAV return
  • Global bonds: Vanguard Total World Bond ETF (BNDW) NAV return

As of August 31, 2022 the weights were:

• Global stocks: $64,278,922 million USD Market cap -- 60.18%
  
  • FTSE Global All Cap Index (GEISLMS) -- Net MCap
• Global bonds: $42,533,160 million USD Market cap -- 39.82%
  
  • FTSE World Broad Investment-Grade Bond Index (WBIG) -- Market Value

For practical investing purpose, I think that the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is a close-enough approximation of the Global Stock-and-Bond Portfolio with a moderate home bias justified by the slightly higher risks (political, etc.) and costs of foreign investing. Conveniently, it can be used as a One-Fund Portfolio. Its August 2022 return was -3.55%.

Here's a growth chart of the Global Stock-and-Bond Portfolio (and Vanguard's LifeStrategy Moderate Growth Fund (VSMGX)) from December 31, 2020 to August 31, 2022:

[longinvest]

This post documents the monthly return and asset class weights as of September 30, 2022 of the (free-float) Global Stock-and-Bond Portfolio or, if you prefer, William Sharpe's Market Portfolio. Here's a link to the previous entry.

The September 2022 return was:

• Global Stock-and-Bond Portfolio: ((60.18% X -9.56% (global stocks)) + (39.82% X -3.57% (global bonds))) = -7.17% (USD)
  
  • Global stocks: Vanguard Total World Stock ETF (VT) NAV return
  • Global bonds: Vanguard Total World Bond ETF (BNDW) NAV return

As of September 30, 2022 the weights were:

• Global stocks: $58,051,224 million USD Market cap -- 58.91%
  
  • FTSE Global All Cap Index (GEISLMS) -- Net MCap
• Global bonds: $40,487,330 million USD Market cap -- 41.09%
  
  • FTSE World Broad Investment-Grade Bond Index (WBIG) -- Market Value

For practical investing purpose, I think that the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is a close-enough approximation of the Global Stock-and-Bond Portfolio with a moderate home bias justified by the slightly higher risks (political, etc.) and costs of foreign investing. Conveniently, it can be used as a One-Fund Portfolio. Its September 2022 return was -7.25%.

Here's a growth chart of the Global Stock-and-Bond Portfolio (and Vanguard's LifeStrategy Moderate Growth Fund (VSMGX)) from December 31, 2020 to September 30, 2022:

[djm2001]

The latest Rational Reminder Podcast covers a relevant topic: Who Should Invest in (Cap Weighted) Index Funds? It covers the reasons to (and not to) use the market portfolio, supported by discussions with Cochrane, Fama, and other economists.

[longinvest]

This post documents the monthly return and asset class weights as of October 31, 2022 of the (free-float) Global Stock-and-Bond Portfolio or, if you prefer, William Sharpe's Market Portfolio. Here's a link to the previous entry.

The October 2022 return was:

• Global Stock-and-Bond Portfolio: ((58.91% X 6.26% (global stocks)) + (41.09% X -0.36% (global bonds))) = 3.54% (USD)
  
  • Global stocks: Vanguard Total World Stock ETF (VT) NAV return
  • Global bonds: Vanguard Total World Bond ETF (BNDW) NAV return

As of October 31, 2022 the weights were:

• Global stocks: $61,428,351 million USD Market cap -- 60.27%
  
  • FTSE Global All Cap Index (GEISLMS) -- Net MCap
• Global bonds: $40,489,080 million USD Market cap -- 39.73%
  
  • FTSE World Broad Investment-Grade Bond Index (WBIG) -- Market Value

For practical investing purpose, I think that the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is a close-enough approximation of the Global Stock-and-Bond Portfolio with a moderate home bias justified by the slightly higher risks (political, etc.) and costs of foreign investing. Conveniently, it can be used as a One-Fund Portfolio. Its October 2022 return was 3.39%.

Here's a growth chart of the Global Stock-and-Bond Portfolio (and Vanguard's LifeStrategy Moderate Growth Fund (VSMGX)) from December 31, 2020 to October 31, 2022:

[dkturner]

This post documents the monthly return and asset class weights as of October 31, 2022 of the (free-float) Global Stock-and-Bond Portfolio or, if you prefer, William Sharpe's Market Portfolio. Here's a link to the previous entry.

The October 2022 return was:

• Global Stock-and-Bond Portfolio: ((58.91% X 6.26% (global stocks)) + (41.09% X -0.36% (global bonds))) = 3.54% (USD)
  
  • Global stocks: Vanguard Total World Stock ETF (VT) NAV return
  • Global bonds: Vanguard Total World Bond ETF (BNDW) NAV return

How has it performed compared to Vanguard’s actively managed moderate growth balanced funds, STAR (VGSTX) and Wellington (VWE
As of October 31, 2022 the weights were:

• Global stocks: $61,428,351 million USD Market cap -- 60.27%
  
  • FTSE Global All Cap Index (GEISLMS) -- Net MCap
• Global bonds: $40,489,080 million USD Market cap -- 39.73%
  
  • FTSE World Broad Investment-Grade Bond Index (WBIG) -- Market Value

For practical investing purpose, I think that the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is a close-enough approximation of the Global Stock-and-Bond Portfolio with a moderate home bias justified by the slightly higher risks (political, etc.) and costs of foreign investing. Conveniently, it can be used as a One-Fund Portfolio. Its October 2022 return was 3.39%.

Here's a growth chart of the Global Stock-and-Bond Portfolio (and Vanguard's LifeStrategy Moderate Growth Fund (VSMGX)) from December 31, 2020 to October 31, 2022:

How does it’s return compare to Vanguard’s actively managed balanced funds, STAR (VGSTX) and Wellington (VWELX)?

[longinvest]

This post documents the monthly return and asset-class weights as of November 30, 2022 of the (free-float) Global Stock-and-Bond Portfolio or, if you prefer, William Sharpe's Market Portfolio. Here's a link to the previous entry.

The November 2022 return was:

• Global Stock-and-Bond Portfolio: ((60.27% X 8.42% (global stocks)) + (39.73% X 3.08% (global bonds))) = 6.30% (USD)
  
  • Global stocks: Vanguard Total World Stock ETF (VT) NAV return
  • Global bonds: Vanguard Total World Bond ETF (BNDW) NAV return

As of November 30, 2022 the weights were:

• Global stocks: $65,989,956 million USD Market cap -- 60.73%
  
  • FTSE Global All Cap Index (GEISLMS) -- Net MCap
• Global bonds: $42,671,680 million USD Market cap -- 39.27%
  
  • FTSE World Broad Investment-Grade Bond Index (WBIG) -- Market Value

For practical investing purpose, I think that the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is a close-enough approximation of the Global Stock-and-Bond Portfolio with a moderate home bias justified by the slightly higher risks (political, etc.) and costs of foreign investing. Conveniently, it can be used as a One-Fund Portfolio. Its November 2022 return was 6.38%.

Here's a growth chart of the Global Stock-and-Bond Portfolio (and Vanguard's LifeStrategy Moderate Growth Fund (VSMGX)) from December 31, 2020 to November 30, 2022:

[dkturner]

How does the performance of the Vanguard LifeStrategy Moderate Growth Fund compare with the Vanguard STAR Fund for the last 27 years (since inception of the LifeStrategy funds)?

[itsmeagain]

How does the performance of the Vanguard LifeStrategy Moderate Growth Fund compare with the Vanguard STAR Fund for the last 27 years (since inception of the LifeStrategy funds)?

STAR shines (or shone) more brightly, but see post by longinvest below for changes in portfolio composition over time!

https://www.portfoliovisualizer.com/bac ... ion2_2=100

[longinvest]

How does the performance of the Vanguard LifeStrategy Moderate Growth Fund compare with the Vanguard STAR Fund for the last 27 years (since inception of the LifeStrategy funds)?

Dear Dkturner,

1) The answer to this question is irrelevant to this thread. This isn't a thread about picking the fund which had the highest past returns or the fund which will deliver the highest future returns. There are other threads to discuss that. It's a thread about William Sharpe's Market Portfolio (the global stock-and-bond portfolio).

2) The LifeStrategy Moderate Growth fund used to hold a market-timing fund until 2011. It only added international bonds in 2013. Finally, it increased its exposure to international stocks and bonds in 2015. Its current composition (since 2015) is close enough to the global stock-and-bond portfolio, even though it's not perfectly identical. Investment returns, tracked in this thread since December 31, 2020, are much closer than one could have reasonably anticipated (it's probably just randomness).

Best regards,

longinvest

[dkturner]

How does the performance of the Vanguard LifeStrategy Moderate Growth Fund compare with the Vanguard STAR Fund for the last 27 years (since inception of the LifeStrategy funds)?

Dear Dkturner,

1) The answer to this question is irrelevant to this thread. This isn't a thread about picking the fund which had the highest past returns or the fund which will deliver the highest future returns. There are other threads to discuss that. It's a thread about William Sharpe's Market Portfolio (the global stock-and-bond portfolio).

2) The LifeStrategy Moderate Growth fund used to hold a market-timing fund until 2011. It only added international bonds in 2013. Finally, it increased its exposure to international stocks and bonds in 2015. Its current composition (since 2015) is close enough to the global stock-and-bond portfolio, even though it's not perfectly identical. Investment returns, tracked in this thread since December 31, 2020, are much closer than one could have reasonably anticipated (it's probably just randomness).

Best regards,

longinvest

Both LifeStrategy Moderate Growth and STAR have been actively managed by Vanguard since their inception. They are both adequate proxies for Bill Sharpe’s world market portfolio, although STAR eschews international bonds. I was simply pointing out that anyone interested in a single worldwide fund should take a look at one which has done so with a higher return and a higher Sharpe ratio for the last 27 years.

[longinvest]

Both LifeStrategy Moderate Growth and STAR have been actively managed by Vanguard since their inception. They are both adequate proxies for Bill Sharpe’s world market portfolio, although STAR eschews international bonds. I was simply pointing out that anyone interested in a single worldwide fund should take a look at one which has done so with a higher return and a higher Sharpe ratio for the last 27 years.

Dear Dkturner,

According to Vanguard, the STAR fund has an active management style and the LifeStrategy Moderate Growth fund (VSMGX) has an index management style. William Sharpe's Market Portfolio is a capitalization-weighted index of the global collection of stock and bond markets. The current composition of VSMGX is close enough to it. VSMGX is composed of four capitalization-weighted index funds tracking the four parts of the global stock-and-bond portfolio: U.S. stocks, ex U.S. stocks, U.S. bonds, and ex U.S. bonds. These four funds cover most of their respective markets. (Pink sheet stocks and junk bonds are missing, for example, but they represent tiny parts of the total market).






Best regards,

longinvest

[pascalwager]

I've been studying Sharpe's AAAP paper and realized that Formula 15 and the associated tables could be very useful to someone wanting to avoid contrarian rebalancing (fixed asset class percentages) or buy-and-hold, but also not wanting to hold world market proportions. The total market equity (US and non-US) index market values are available in the BH Wiki in real-time and would allow one to "rebalance" any desired initial ratio of TSM/TISM in a market-sensitive manner. In fact, using a spreadsheet, updated asset allocation target values could be made continuously observable for monthly AAAP adjustments.

This can be done for any grouping of asset classes provided the indices market values are all available.

[longinvest]

This post documents the monthly return and asset-class weights as of December 31, 2022 of the (free-float) Global Stock-and-Bond Portfolio or, if you prefer, William Sharpe's Market Portfolio. Here's a link to the previous entry.

The December 2022 return was:

• Global Stock-and-Bond Portfolio: ((60.73% X -4.39% (global stocks)) + (39.27% X -1.76% (global bonds))) = -3.36% (USD)
  
  • Global stocks: Vanguard Total World Stock ETF (VT) NAV return
  • Global bonds: Vanguard Total World Bond ETF (BNDW) NAV return

As of December 31, 2022 the weights were:

• Global stocks: $63,167,956 million USD Market cap -- 59.70%
  
  • FTSE Global All Cap Index (GEISLMS) -- Net MCap
• Global bonds: $42,645,650 million USD Market cap -- 40.30%
  
  • FTSE World Broad Investment-Grade Bond Index (WBIG) -- Market Value

For practical investing purpose, I think that the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is a close-enough approximation of the Global Stock-and-Bond Portfolio with a moderate home bias justified by the slightly higher risks (political, etc.) and costs of foreign investing. Conveniently, it can be used as a One-Fund Portfolio. Its December 2022 return was -3.21%.

Here's a growth chart of the Global Stock-and-Bond Portfolio (and Vanguard's LifeStrategy Moderate Growth Fund (VSMGX)) from December 31, 2020 to December 31, 2022:

[steve r]

This post documents the monthly return and asset-class weights as of December 31, 2022 of the (free-float) Global Stock-and-Bond Portfolio or, if you prefer, William Sharpe's Market Portfolio. Here's a link to the previous entry.

The December 2022 return was:

• Global Stock-and-Bond Portfolio: ((60.73% X -4.39% (global stocks)) + (39.27% X -1.76% (global bonds))) = -3.36% (USD)
  
  • Global stocks: Vanguard Total World Stock ETF (VT) NAV return
  • Global bonds: Vanguard Total World Bond ETF (BNDW) NAV return

As of December 31, 2022 the weights were:

• Global stocks: $63,167,956 million USD Market cap -- 59.70%
  
  • FTSE Global All Cap Index (GEISLMS) -- Net MCap
• Global bonds: $42,645,650 million USD Market cap -- 40.30%
  
  • FTSE World Broad Investment-Grade Bond Index (WBIG) -- Market Value

For practical investing purpose, I think that the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is a close-enough approximation of the Global Stock-and-Bond Portfolio with a moderate home bias justified by the slightly higher risks (political, etc.) and costs of foreign investing. Conveniently, it can be used as a One-Fund Portfolio. Its December 2022 return was -3.21%.

Here's a growth chart of the Global Stock-and-Bond Portfolio (and Vanguard's LifeStrategy Moderate Growth Fund (VSMGX)) from December 31, 2020 to December 31, 2022:

Thanks for keeping this up. I like the chart you added at some point.

I noticed you signature holds VBAL -- which is similar but to VSMGX, but has a touch more Canadian equities (your home country as I recall). I wonder if this is a new(ish) holding or something I just didn't notice it before?

I love the simplicity of this. Thinking of moving in that direction. (re-reading the OneFund posts)

[longinvest]

Thanks for keeping this up. I like the chart you added at some point.

I noticed you signature holds VBAL -- which is similar but to VSMGX, but has a touch more Canadian equities (your home country as I recall). I wonder if this is a new(ish) holding or something I just didn't notice it before?

I love the simplicity of this. Thinking of moving in that direction. (re-reading the OneFund posts)

Steve, thanks for the nice comment. Like VSMGX, VBAL is a global 60/40 stocks/bonds portfolio, but with a Canadian home bias. Vanguard Canada created the ETF in January 2018. We entirely switched our portfolio into it one year later, in February 2019. The objectives were to simplify investing for my wife and to stop me from tinkering with our portfolio. Both objectives have been met. I track its returns along with those of the global stock-and-bond portfolio (in Canadian dollars) in this thread of the financial wisdom forum, this site's Canadian sister forum.

[mwrenn]

This post documents the monthly return and asset-class weights as of December 31, 2022 of the (free-float) Global Stock-and-Bond Portfolio or, if you prefer, William Sharpe's Market Portfolio. Here's a link to the previous entry.

The December 2022 return was:

• Global Stock-and-Bond Portfolio: ((60.73% X -4.39% (global stocks)) + (39.27% X -1.76% (global bonds))) = -3.36% (USD)
  
  • Global stocks: Vanguard Total World Stock ETF (VT) NAV return
  • Global bonds: Vanguard Total World Bond ETF (BNDW) NAV return

As of December 31, 2022 the weights were:

• Global stocks: $63,167,956 million USD Market cap -- 59.70%
  
  • FTSE Global All Cap Index (GEISLMS) -- Net MCap
• Global bonds: $42,645,650 million USD Market cap -- 40.30%
  
  • FTSE World Broad Investment-Grade Bond Index (WBIG) -- Market Value

For practical investing purpose, I think that the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is a close-enough approximation of the Global Stock-and-Bond Portfolio with a moderate home bias justified by the slightly higher risks (political, etc.) and costs of foreign investing. Conveniently, it can be used as a One-Fund Portfolio. Its December 2022 return was -3.21%.

Here's a growth chart of the Global Stock-and-Bond Portfolio (and Vanguard's LifeStrategy Moderate Growth Fund (VSMGX)) from December 31, 2020 to December 31, 2022:

I am new to this thread and catching up so forgive me if I missed something that has already been discussed.

As I understand it, Bill Sharp endorsed the use of the FTSE AAAP Calculator as the best basis for allocating between VT and BNDW. The AAAP Calculator has cited those weights to be roughly (i.e., within +/- 5%) at 50/50 Global Stocks/Global Bonds every month since about 2014. For Dec 2022 the AAAP cites 52% Global Stocks / 48% Global Bonds. The AAAP Calculator hasn't cited weights in the range of 60/40 for many years. Why would one want to use the 60/40 weights implied by the longvest methodology rather than the AAAP?

Context:

FTSE AAAP Overview https://research.ftserussell.com/Analyt ... Home/Index

FTSE AAAP Calculator Weightings Jan 2004 - Dec 2022 https://research.ftserussell.com/Analyt ... Calculator

FTSE AAAP User Guide https://research.ftserussell.com/Analyt ... _Guide.pdf

[asset_chaos]

Yes, discussed upthread somewhere. Short answer: it's the bonds. The 40% comes from restricting bonds to investment grade, i.e. the index cited is the FTSE World Broad Investment Grade bond index. The calculator, which I think is the one discussed upthread, uses an index that includes non-investment grade bonds and, from memory, warrants and other classes of debt instruments excluded from investment grade bond indices. And the world of non-investment grade loans is much larger than you might think, certainly much larger than I thought before the posts upthread.

[mwrenn]

Yes, discussed upthread somewhere. Short answer: it's the bonds. The 40% comes from restricting bonds to investment grade, i.e. the index cited is the FTSE World Broad Investment Grade bond index. The calculator, which I think is the one discussed upthread, uses an index that includes non-investment grade bonds and, from memory, warrants and other classes of debt instruments excluded from investment grade bond indices. And the world of non-investment grade loans is much larger than you might think, certainly much larger than I thought before the posts upthread.

Thanks. But, wouldn't using the larger bond capitalization that includes all bonds (i.e., doesn't restrict to investment grade) be more consistent with holding Sharpe's "market" and result in a more efficient portfolio (i.e., higher return per unit risk)? If not, why?

[longinvest]

It's interesting that Bill Sharpe's latest blog entry, on March 25, 2021 (almost 2 years ago), links to a document which contains a self-criticism about his previous suggestion to put the market portfolio and TIPS into distinct buckets of an investor's portfolio, in Chapter 7 "The Market Portfolio" of his RISMAT series:

The Market Portfolio (RISMAT-7), page 38:

More simply put, we will use only combinations of the market portfolio (shown here for a relative risk of 100) and TIPS (here, with a relative risk of 0). Moreover, since every mix is a combination of a risk-free security and a risky one, the standard deviation will be a linear function of the amount invested in the market mix. These mixes are fine for our purposes, and probably reasonable strategies for many retirees.

World Bond and Stock Values at Year-end 2020 (GoogleDrive document linked from Bill Sharpe's March 2021 blog entry):

On a related subject, here is a final observation. I have argued that the only truly riskless real securities for U.S. investors are Treasury Ibonds and TIPS (Treasury Inflation Protected Securities). According to the GAO Financial Audit, the par value of such securities held by the public on September 30, 2020 was $1.522 Trillion. The market values of these securities are presumably included in the U.S. bond value used in the pie chart above. In principle, they should not be included in the risky “world bond/stock portfolio”. That said, the differences in total values would be minimal, since the total value of U.S. inflation-protected securities is tiny relative to that of the world bond/stock portfolio ($1.5 Trillion, compared to $180 Trillion). Far more important is the fact that this calls into serious question the ability of a significant proportion of investors to use (1) Ibonds and/or TIPS for a safe security and (2) a world bond/stock portfolio for a risky, higher-return portfolio. But that is a subject for another time and place.

I'm happy to read that Bill Sharpe shares the view I expressed in January 2020, when discussing RISMAT-7 with forum member Watchnerd:

But I hope you realize that's not what Sharpe is advocating.

He's advocating for a bucket approach in which only the risky bucket = VSMGX.

Yes, I'm (unfortunately) aware of this. I do not agree with the bucket method that William Sharpe is advocating as it's illogical.

I also think that it's illogical to consider TIPS as a "safe asset" and ignore that they're marketable securities with a market capitalization and fluctuating prices; this contradicts the very principles on which his (beautiful and logical) Market Portfolio is based.

But, we're getting off topic.

[exodusing]

@longinvest, it appears you and Bill Sharpe are making different points. You're saying TIPS can't be used as a safe asset because their value fluctuates. Sharpe is saying everyone can't use TIPS as a safe asset because there aren't enough of them and his preferred portfolio should be able to be held by everyone.

Apologies if I'm misunderstanding, as I haven't been following this thread.

[longinvest]

Thanks. But, wouldn't using the larger bond capitalization that includes all bonds (i.e., doesn't restrict to investment grade) be more consistent with holding Sharpe's "market" and result in a more efficient portfolio (i.e., higher return per unit risk)? If not, why?

Mwrenn, welcome to the forum!

While theoretically beautiful, Bill Sharpe's Market Portfolio (global stock-and-bond portfolio) is difficult to perfectly implement. Actually, this is true of index investing in general. It's probably possible get indexing 95%+ right, but perfection is most probably out of reach, even for big mutual fund and ETF providers.

Vanguard has switched, over the years, the indices it tacks, for its index funds and ETFs to float-adjusted indices. But, what's float? That's a good question. Let's refine my question.

What's float, when market liquidity dries up? Not long ago, for a few months in 2020, some index providers stopped publishing bond market index data due to lack of liquidity in the bond market. FTSE, in particular, stopped providing its monthly FTSE World Broad Investment-Grade Bond Index (WorldBIG) fact sheet for three months. You'll be able to find a fact sheet for July 2020, and for November 2020, but none in between. So, how is an index fund or ETF supposed to adjust to market weights during such a period? (Answer: it can't).

Also, Vanguard's Total World Bond ETF (BNDW) doesn't track a FTSE index. It tracks the "Bloomberg Global Aggregate Float Adjusted Composite Index, which is designed to track the market capitalized weights of the global investment-grade bond market and is comprised of the Bloomberg U.S. Aggregate Float Adjusted Index and the Bloomberg Aggregate ex- USD Float Adjusted RIC Capped Index (USD Hedged)" (source). This is a float-adjusted index, with some caps (I think that the cap significantly affects Japan bonds, due to their gigantic capitalization), and it only includes investment-grade bonds, excluding various special types of bonds like TIPS and floating-rate bonds.

Sharpe's document linked from his March 2021 blog entry reports that "the estimated total value of traded bonds and stocks was approximately 180 trillion U.S. Dollars" at the end of December 2020. The accompanying figure "provides the associated estimates of the relative market values of these asset classes at the time" as percentages:

• 28.2% U.S. stocks
• 21.2% U.S. bonds
• 29.2% non-U.S. bonds
• 21.4% non-U.S. stocks

Bill Sharpe used the FTSE Russel AAAP Calculator for the proportions of global stocks and bonds. So, the AAAP Calculator's estimate for global stocks is ((28.2% U.S. stocks + 21.4% non-U.S. stocks) X 180 trillion U.S. Dollars) = 89 trillion U.S. Dollars. Yet, the December 2020 factsheet of the FTSE Global All Cap Index, tracked by Vanguard's VT, reports a market capitalization of 66 trillion U.S. Dollars. That's -25% smaller! My guess is that the AAAP Calculator probably includes many assets not included in Vanguard's VT (and BNDW), or it might not use the same float adjustments (or caps). What's certain is that there are significant differences.

Bill Sharpe only claims, in the linked document, that the percentages are an estimate of asset weights, implying that they're not exact measurements.

Why am I writing monthly posts, even though the FTSE Russel AAAP Calculator exists? For many reasons:

• There's no need to register to read my posts.
• The posts provide full transparency with links to published index fact sheets so that readers can verify the numbers (and report mistakes, if any),
• The FTSE Global All Cap Index and the FTSE World Broad Investment-Grade Bond Index seem like good enough representatives of the markets tracked by Vanguard's VT and BNDW ETFs.
• The posts provide the returns of a portfolio composed of two real-world ETFs (VT + BNDW) after fees, instead of synthetic index returns.
• This forum (and any public archive of it) is less likely to completely disappear without trace than the FTSE Russel AAAP Calculator which is only privately accessible by registered users.

[longinvest]

@longinvest, it appears you and Bill Sharpe are making different points. You're saying TIPS can't be used as a safe asset because their value fluctuates. Sharpe is saying everyone can't use TIPS as a safe asset because there aren't enough of them and his preferred portfolio should be able to be held by everyone.

Apologies if I'm misunderstanding, as I haven't been following this thread.

Exodusing, part of a sentence I wrote reads as follows: "I also think that it's illogical to consider TIPS as a "safe asset" and ignore that they're marketable securities with a market capitalization and fluctuating prices[...]". I exactly meant that TIPS were constrained by market capitalization, implying that if investors were to flock into them, their price would inflate until the capitalization reaches the implied "fixed" demand for them (or, more likely, until demand decreases because investors consider TIPS too expensive). This is a basic implication of the Law of supply and demand.

It might be interesting to some readers to learn that the Canadian government which began issuing real return bonds (RRB) in 1991 (they're the Canadian equivalent to U.S. TIPS) has decided in November 2022 (2 months ago) to immediately stop issuing new RRBs (just before the usual December 1 issue date). Such decisions are apparently possible.

[exodusing]

@longinvest, it appears you and Bill Sharpe are making different points. You're saying TIPS can't be used as a safe asset because their value fluctuates. Sharpe is saying everyone can't use TIPS as a safe asset because there aren't enough of them and his preferred portfolio should be able to be held by everyone.

Apologies if I'm misunderstanding, as I haven't been following this thread.

Exodusing, part of a sentence I wrote reads as follows: "I also think that it's illogical to consider TIPS as a "safe asset" and ignore that they're marketable securities with a market capitalization and fluctuating prices[...]". I exactly meant that TIPS were constrained by market capitalization, implying that if investors were to flock into them, their price would inflate until the capitalization reaches the implied "fixed" demand for them (or, more likely, until demand decreases because investors consider TIPS too expensive). This is a basic implication of the Law of supply and demand.

Yes, every marketable security has a market capitalization whose price fluctuates based on supply and demand. TIPS are in rather short supply for something intended to balance the market portfolio for everyone (and would therefore quickly become too expensive, as you note).

If you are going to divide the world into a market portfolio and a safe asset, what would you use as a safe asset? Or is there no such thing (or such division not a sensible method)?

[longinvest]

If you are going to divide the world into a market portfolio and a safe asset, what would you use as a safe asset? Or is there no such thing?

Exodusing, money is basically just a promise. Any promise can be broken. Even physical objects can break. What's perfectly safe in life? I really don't know.

I accept the uncertainty. I put retirement investments into a global balanced index portfolio (similar to VSMGX but with a different home bias) and keep a few months of projected expenses in a high-interest savings account. I know that I'll have to keep adapting to whatever the future brings. My plan is built accordingly. My main planning tool is VPW which adapts to market returns (as well as other things like age, asset allocation, and promised pensions) during accumulation and retirement.

[asset_chaos]

Yes, discussed upthread somewhere. Short answer: it's the bonds. The 40% comes from restricting bonds to investment grade, i.e. the index cited is the FTSE World Broad Investment Grade bond index. The calculator, which I think is the one discussed upthread, uses an index that includes non-investment grade bonds and, from memory, warrants and other classes of debt instruments excluded from investment grade bond indices. And the world of non-investment grade loans is much larger than you might think, certainly much larger than I thought before the posts upthread.

Thanks. But, wouldn't using the larger bond capitalization that includes all bonds (i.e., doesn't restrict to investment grade) be more consistent with holding Sharpe's "market" and result in a more efficient portfolio (i.e., higher return per unit risk)? If not, why?

Implementation of a theory is about making choices of what becomes practical and not too costly to implement. BNDW, or its component funds, is cheap and easy for an individual investor to invest in. The more exotic the bond niche, the more costly and difficult it is to access, even if it's possible for an individual investor. You get to choose how you'll approximate. If only investment grade bonds, then more stocks and a portfolio that is somewhat riskier than ideal. But, if take the weighting of the full debt index but invest with only investment grade, then the portfolio is somewhat less risky than ideal. And personally I'd prefer an approximation---not that I personally invest according to a global market portfolio---that is low cost to implement, which I believe is the case for the VT/BNDW combination.

And while there are reasonable funds to access some, but by no means all, of the non-investment grade area---e.g. junk bond funds and emerging market government bond funds---the simplicity of the VT/BNDW combination also argues that its a better approximation to target for an individual investor---if the individual investor wants to invest that way. Others can argue for other approximations and would not be wrong, but I think the lowest cost and simplest approximation would be hard to beat in practice.

[Cocoa Beach Bum]

...

As of December 31, 2022 the weights were:

• Global stocks: $63,167,956 million USD Market cap -- 59.70%
  
  • FTSE Global All Cap Index (GEISLMS) -- Net MCap
• Global bonds: $42,645,650 million USD Market cap -- 40.30%
  
  • FTSE World Broad Investment-Grade Bond Index (WBIG) -- Market Value

...

Wouldn't the FTSE Global Total Cap Index (TCG) - "representing over 99% of investable market cap globally" - be a better gauge of the global stock market? Its most recent (12/30/2022) Market cap was $64,599,065 million USD.

[djm2001]

Wouldn't the FTSE Global Total Cap Index (TCG) - "representing over 99% of investable market cap globally" - be a better gauge of the global stock market? Its most recent (12/30/2022) Market cap was $64,599,065 million USD.

When investing in VT, use the index that VT tracks, i.e., FTSE Global All Cap Index. When investing in a fund that tracks FTSE Global Total Cap Index, use that index. Making portfolio decisions using a better index (more complete, better float adjustment, etc.) is inaccurate if you're not actually invested in it. Buy what you measure, and measure what you buy. Overlooking this principle is a source of confusion (e.g., the AAAP Calculator allocation vs VT/BNDW allocation discussed above).

[Cocoa Beach Bum]

...
When investing in VT, use the index that VT tracks, i.e., FTSE Global All Cap Index. When investing in a fund that tracks FTSE Global Total Cap Index, use that index. Making portfolio decisions using a better index (more complete, better float adjustment, etc.) is inaccurate if you're not actually invested in it. Buy what you measure, and measure what you buy. Overlooking this principle is a source of confusion (e.g., the AAAP Calculator allocation vs VT/BNDW allocation discussed above).

It can easily be argued that using VT as the vehicle to obtain global stock market coverage is inferior to using a combination of VTI, VEA and VWO, with regard to both the number of stocks covered and the total expense ratio. If you're not using the index tracked by BNDW for weighting, then you don't need to use the index tracked by VT, either.