Bill Sharpe's preferred portfolio

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aj76er
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Re: Bill Sharpe's preferred portfolio

Post by aj76er »

longinvest wrote: Sun Jan 21, 2024 9:50 am 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 think Sharpe is highlighting this as a problem for large institutional investors and/or retail funds (e.g. target date funds). If these investors replaced their nominal bond holdings with TIPS, it would distort the market and push up the price of TIPS, thereby creating large premiums.

However, as a small-time, individual investor, if I can buy TIPS at a discount and IBonds at a positive fixed rate, then why not? The global aggregate bond market does not match my personal duration, and I don’t have nominal future liabilities (just real liabilities that track inflation).

Stocks, on the other hand, are a whole other ballgame. The future earnings and cash flows of a business are uncertain, so holding the “market” makes a lot of sense here.
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Re: Bill Sharpe's preferred portfolio

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aj76er wrote: Sun Jan 21, 2024 10:39 am
longinvest wrote: Sun Jan 21, 2024 9:50 am 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 think Sharpe is highlighting this as a problem for large institutional investors and/or retail funds (e.g. target date funds). If these investors replaced their nominal bond holdings with TIPS, it would distort the market and push up the price of TIPS, thereby creating large premiums.

However, as a small-time, individual investor, if I can buy TIPS at a discount and IBonds at a positive fixed rate, then why not? The global aggregate bond market does not match my personal duration, and I don’t have nominal future liabilities (just real liabilities that track inflation).

Stocks, on the other hand, are a whole other ballgame. The future earnings and cash flows of a business are uncertain, so holding the “market” makes a lot of sense here.
Exactly.

The TIPS / Ibonds liquidity issue doesn't apply to individual investors; there is no reason for small scale investors to eschew TIPS for liquidity reasons that apply when you have $1B+ AUM.

Without a 'safe asset' to hold in conjunction with the global bond market, you're left with accepting the average duration of the global bond market as your personal risk duration.

Which may be entirely unsuitable.
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Re: Bill Sharpe's preferred portfolio

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The amount of future spending covered by duration-matched TIPS vs the amount covered by Sharpe's World Bond-Stock (WBS) portfolio is a question of how much personalization one wants to do. Similar to how an investor can sit anywhere on the capital market line in textbook MPT, an investor can hold only duration-matched TIPS (and other LMP assets), or can hold only Sharpe's World Bond-Stock portfolio (perhaps even leveraged up), or can hold any desired mix of the two. There's no "right" answer.

As a counterexample to watchnerd and aj76er, I have close to zero personalization -- i.e., I hold no TIPS beyond their tiny market weight; and I hold only a very small amount of I-bonds. I feel comfortable with this because my actual spending is very low relative to my WBS portfolio balance (< 2% WR). Maybe some day I'll exchange a portion of my WBS for a duration-matched TIPS ladder, but at the moment I'm happy eating the average stock and bond market return, even given the cumulative negative real return spanning the last 2-3 years.
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
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Re: Bill Sharpe's preferred portfolio

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djm2001 wrote: Sun Jan 21, 2024 11:55 am The amount of future spending covered by duration-matched TIPS vs the amount covered by Sharpe's World Bond-Stock (WBS) portfolio is a question of how much personalization one wants to do. Similar to how an investor can sit anywhere on the capital market line in textbook MPT, an investor can hold only duration-matched TIPS (and other LMP assets), or can hold only Sharpe's World Bond-Stock portfolio (perhaps even leveraged up), or can hold any desired mix of the two. There's no "right" answer.

As a counterexample to watchnerd and aj76er, I have close to zero personalization -- i.e., I hold no TIPS beyond their tiny market weight; and I hold only a very small amount of I-bonds. I feel comfortable with this because my actual spending is very low relative to my WBS portfolio balance (< 2% WR). Maybe some day I'll exchange a portion of my WBS for a duration-matched TIPS ladder, but at the moment I'm happy eating the average stock and bond market return, even given the cumulative negative real return spanning the last 2-3 years.
Which makes total sense.

What doesn't make sense is to assert that the average duration of the global bond market is ipso facto the correct duration for specific individuals because markets are efficient.
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

Yep, we're on the same page -- a total aggregate bond fund (e.g., BNDW) is not "the safe asset". To my mind, the flip side of that very same coin merits its inclusion in the "risky basket" (Sharpe's WBS).
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Re: Bill Sharpe's preferred portfolio

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FWIW, TIPS liquidity concerns haven't prevented DFA from making TDF funds that are ~70% TIPS:

https://www.dimensional.com/us-en/funds ... ncome-fund
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Re: Bill Sharpe's preferred portfolio

Post by Circle the Wagons »

Watchnerd, would you share the funds you use for HY/IG exposure and how you estimate their mkt cap share?

djm, one area where it seems you and watchnerd disagree is whether to include government bonds in the WBS. Looks like you have them. I am wondering if there is a definitive argument either way.

thanks
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Re: Bill Sharpe's preferred portfolio

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Circle the Wagons wrote: Thu Jan 25, 2024 3:58 pm Watchnerd, would you share the funds you use for HY/IG exposure and how you estimate their mkt cap share?

djm, one area where it seems you and watchnerd disagree is whether to include government bonds in the WBS. Looks like you have them. I am wondering if there is a definitive argument either way.

thanks
The source for IG credit is the same as above, the FTSE World BIG index:

https://research.ftserussell.com/Analyt ... anual=True

I use the corporate and covered line items.

High yield is FTSE World High-Yield index:

https://research.ftserussell.com/Analyt ... anual=True

The fund I use is VGCAX, which isn't a perfect proxy for either of these indexes, but I haven't yet found anything better, and the weightings are "directionally correct" (mostly corporate, mostly IG, some HY, roughly half US, USD hedged):

https://investor.vanguard.com/investmen ... file/vgcax
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Re: Bill Sharpe's preferred portfolio

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Circle the Wagons wrote: Thu Jan 25, 2024 3:58 pm djm, one area where it seems you and watchnerd disagree is whether to include government bonds in the WBS. Looks like you have them. I am wondering if there is a definitive argument either way.
This post sums up my view (with an excerpt from Sharpe himself). I strongly agree that corporate bonds (both IG and HY) belong in WBS. For government bonds, it boils down to two questions:
  1. Are government bonds an investment in productive enterprise?
  2. Does the public (in aggregate) hold both the government bond and the liability for that debt simultaneously? (Because if so, it nets out to zero and should not contribute to the market portfolio.)
I'll admit that government bonds sometimes leave me scratching my head about what exactly I'm investing in. However, I always eventually come back round to Sharpe's position on the matter (quoted in the first link) which I believe implies an answer of yes to the first question (via human capital of future taxpayers) and no to the second (at any point in time, the liability is skewed toward future generations). And so I do include them in my WBS.
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
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Re: Bill Sharpe's preferred portfolio

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djm2001 wrote: Thu Jan 25, 2024 7:50 pm
Circle the Wagons wrote: Thu Jan 25, 2024 3:58 pm djm, one area where it seems you and watchnerd disagree is whether to include government bonds in the WBS. Looks like you have them. I am wondering if there is a definitive argument either way.
This post sums up my view (with an excerpt from Sharpe himself). I strongly agree that corporate bonds (both IG and HY) belong in WBS. For government bonds, it boils down to two questions:
  1. Are government bonds an investment in productive enterprise?
  2. Does the public (in aggregate) hold both the government bond and the liability for that debt simultaneously? (Because if so, it nets out to zero and should not contribute to the market portfolio.)
I'll admit that government bonds sometimes leave me scratching my head about what exactly I'm investing in. However, I always eventually come back round to Sharpe's position on the matter (quoted in the first link) which I believe implies an answer of yes to the first question (via human capital of future taxpayers) and no to the second (at any point in time, the liability is skewed toward future generations). And so I do include them in my WBS.
I always find this debate incredibly interesting.

I find both points of view very interesting and don't have a strong philosophical leaning either way.

However....

I have a TIPS LMP ladder that is a substantial part of my total portfolio (total portfolio = LMP ladder + risk port).

TIPS are 45% of my total portfolio, and 82% of my total bond holdings. Which makes my total allocation *massively* overweighted to US Treasuries vs global bond market cap.

It also makes my total exposure to US bonds (of any kind) 91%.

To correct this, I eschew holding Treasuries in my risk port, to avoid making an already overweight situation even more so.

FWIW, I'm kind of surprised that Sharpe hasn't delved into this; he treats the "lock boxes" of TIPS as if their hyper-concentration in Treasuries shouldn't be factored into the global bond market holdings.
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Re: Bill Sharpe's preferred portfolio

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I think that discomfort of holding both market weight of Treasuries in WBS and a TIPS LMP highlights the gap between the theory and practice of assuming zero risk of Treasury default, which is implied by treating TIPS as the risk-free asset. In practice, one should worry at least a little about Treasury default risk. One mitigation option is to downweight Treasuries on the WBS side (your approach... although I think you mentioned in a different thread you have other reasons for eschewing sovereign bonds besides Treasury default risk). Another option is to downweight the risk-free side reliant on Treasuries/TIPS (my approach... although that's not the only reason; another reason is complexity and, frankly, lack of foresight/understanding about what ratio of LMP vs risky portfolio is right for me).
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Re: Bill Sharpe's preferred portfolio

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djm2001 wrote: Thu Jan 25, 2024 10:15 pm you have other reasons for eschewing sovereign bonds besides Treasury default risk
Correct.

I could say:

"Well, I may be overweight Treasuries because of TIPS, but that doesn't apply to sovereign bonds of other nations."

Which then circles back to questions like:

"Is Japanese yen debt market cap weight really the market when BOJ buys so much of it?"

It's a complicated question, and in some ways a decision is made easier by the fact that there aren't any bond funds (that I've found) that are US IG/HY, but not Treasuries, but yes to all ex-USD bonds.
Last edited by watchnerd on Fri Jan 26, 2024 5:28 am, edited 1 time in total.
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

watchnerd wrote: Thu Jan 25, 2024 10:36 pm "Is Japanese yen debt market cap weight really the market when BOJ buys so much of it?"
I rely on the index's float adjustment to fix these distortions. For example, Bloomberg Fixed Income Index Methodology says that they "adjust the par amount outstanding for central government holdings". In fact, they specifically mention that they adjust Japanese Government Bonds par amount outstanding for Bank of Japan purchases. They do something similar for Federal Reserve purchases of Treasury bonds. If float adjustment is done correctly, the result is that the index fund's capital allocation mimics how public float capital navigates around central bank distortions.

So for me, it's both more convenient and more surgical to let float adjustment remove central bank holdings than to try to fix it myself by omitting certain assets entirely.
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Re: Bill Sharpe's preferred portfolio

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djm2001 wrote: Thu Jan 25, 2024 7:50 pm
Circle the Wagons wrote: Thu Jan 25, 2024 3:58 pm djm, one area where it seems you and watchnerd disagree is whether to include government bonds in the WBS. Looks like you have them. I am wondering if there is a definitive argument either way.
This post sums up my view (with an excerpt from Sharpe himself). I strongly agree that corporate bonds (both IG and HY) belong in WBS. For government bonds, it boils down to two questions:
  1. Are government bonds an investment in productive enterprise?
  2. Does the public (in aggregate) hold both the government bond and the liability for that debt simultaneously? (Because if so, it nets out to zero and should not contribute to the market portfolio.)
I'll admit that government bonds sometimes leave me scratching my head about what exactly I'm investing in. However, I always eventually come back round to Sharpe's position on the matter (quoted in the first link) which I believe implies an answer of yes to the first question (via human capital of future taxpayers) and no to the second (at any point in time, the liability is skewed toward future generations). And so I do include them in my WBS.
I have totally dumped Government bonds just am focusing diversified portfolio of big cap corporate bonds, which will mature 2044+. Coincides with when Iam getting Social Security Checks when I turn 70.

I get 6.5% yield currently and will get a capital gain when bond matures.

Basically when you have rate at-least 3% higher than government bonds then it pays for the risk you take.
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Re: Bill Sharpe's preferred portfolio

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invest2bfree wrote: Fri Jan 26, 2024 8:39 amI have totally dumped Government bonds just am focusing diversified portfolio of big cap corporate bonds, which will mature 2044+. Coincides with when Iam getting Social Security Checks when I turn 70.

I get 6.5% yield currently and will get a capital gain when bond matures.

Basically when you have rate at-least 3% higher than government bonds then it pays for the risk you take.
AAA corporates are currently yielding about 5%. A 6.5% yield implies significantly more risk - it's about half way between AAA and junk at 7.9%. There's no guarantee that this additional yield is enough to make up for the risk.
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Re: Bill Sharpe's preferred portfolio

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invest2bfree wrote: Fri Jan 26, 2024 8:39 am
djm2001 wrote: Thu Jan 25, 2024 7:50 pm
Circle the Wagons wrote: Thu Jan 25, 2024 3:58 pm djm, one area where it seems you and watchnerd disagree is whether to include government bonds in the WBS. Looks like you have them. I am wondering if there is a definitive argument either way.
This post sums up my view (with an excerpt from Sharpe himself). I strongly agree that corporate bonds (both IG and HY) belong in WBS. For government bonds, it boils down to two questions:
  1. Are government bonds an investment in productive enterprise?
  2. Does the public (in aggregate) hold both the government bond and the liability for that debt simultaneously? (Because if so, it nets out to zero and should not contribute to the market portfolio.)
I'll admit that government bonds sometimes leave me scratching my head about what exactly I'm investing in. However, I always eventually come back round to Sharpe's position on the matter (quoted in the first link) which I believe implies an answer of yes to the first question (via human capital of future taxpayers) and no to the second (at any point in time, the liability is skewed toward future generations). And so I do include them in my WBS.
I have totally dumped Government bonds just am focusing diversified portfolio of big cap corporate bonds, which will mature 2044+. Coincides with when Iam getting Social Security Checks when I turn 70.

I get 6.5% yield currently and will get a capital gain when bond matures.

Basically when you have rate at-least 3% higher than government bonds then it pays for the risk you take.
How many individual corporates do you hold?
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Re: Bill Sharpe's preferred portfolio

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watchnerd wrote: Fri Jan 26, 2024 9:38 am
invest2bfree wrote: Fri Jan 26, 2024 8:39 am
djm2001 wrote: Thu Jan 25, 2024 7:50 pm
Circle the Wagons wrote: Thu Jan 25, 2024 3:58 pm djm, one area where it seems you and watchnerd disagree is whether to include government bonds in the WBS. Looks like you have them. I am wondering if there is a definitive argument either way.
This post sums up my view (with an excerpt from Sharpe himself). I strongly agree that corporate bonds (both IG and HY) belong in WBS. For government bonds, it boils down to two questions:
  1. Are government bonds an investment in productive enterprise?
  2. Does the public (in aggregate) hold both the government bond and the liability for that debt simultaneously? (Because if so, it nets out to zero and should not contribute to the market portfolio.)
I'll admit that government bonds sometimes leave me scratching my head about what exactly I'm investing in. However, I always eventually come back round to Sharpe's position on the matter (quoted in the first link) which I believe implies an answer of yes to the first question (via human capital of future taxpayers) and no to the second (at any point in time, the liability is skewed toward future generations). And so I do include them in my WBS.
I have totally dumped Government bonds just am focusing diversified portfolio of big cap corporate bonds, which will mature 2044+. Coincides with when Iam getting Social Security Checks when I turn 70.

I get 6.5% yield currently and will get a capital gain when bond matures.

Basically when you have rate at-least 3% higher than government bonds then it pays for the risk you take.
How many individual corporates do you hold?
About 18 Corporates,each representing no more than 2% of my overall portfolio.

I look at the market cap, if it is 50b plus, I just add them.
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Re: Bill Sharpe's preferred portfolio

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exodusing wrote: Fri Jan 26, 2024 9:30 am
invest2bfree wrote: Fri Jan 26, 2024 8:39 amI have totally dumped Government bonds just am focusing diversified portfolio of big cap corporate bonds, which will mature 2044+. Coincides with when Iam getting Social Security Checks when I turn 70.

I get 6.5% yield currently and will get a capital gain when bond matures.

Basically when you have rate at-least 3% higher than government bonds then it pays for the risk you take.
AAA corporates are currently yielding about 5%. A 6.5% yield implies significantly more risk - it's about half way between AAA and junk at 7.9%. There's no guarantee that this additional yield is enough to make up for the risk.
I understand so I am diversified, no more than 2% of my portfolio.

Also underlying stock should have a market cap of 50b_.
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

Based on that and on your signature, neither your stock nor bond choices sound anything remotely like Bill Sharpe's preferred portfolio! :P
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Re: Bill Sharpe's preferred portfolio

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djm2001 wrote: Thu Jan 25, 2024 10:15 pm In practice, one should worry at least a little about Treasury default risk.
One way to mitigate this, at least somewhat, is to hold the market weight in gold and/or other precious metals. In our risk port, we hold around 5% in gold ETFs, which approximates world cap weight (rounded up a bit).

So our risk port is essentially global equities and gold. For bonds, as I mentioned up-thread, I now treat them as non-risky assets that are duration matched to our personal planning horizon.

I agree that the sizing of the risk and non-risk portions of the portfolio are a little arbitrary and are based on personal preference for how much opportunity cost one is willing to sacrifice for (near) certainty of matching one’s liabilities, how certain one is of their future liabilities, and how optimistic one is about the future market returns (e.g. the risk portfolio).
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Re: Bill Sharpe's preferred portfolio

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aj76er wrote: Fri Jan 26, 2024 2:39 pm
djm2001 wrote: Thu Jan 25, 2024 10:15 pm In practice, one should worry at least a little about Treasury default risk.
One way to mitigate this, at least somewhat, is to hold the market weight in gold and/or other precious metals. In our risk port, we hold around 5% in gold ETFs, which approximates world cap weight (rounded up a bit).

So our risk port is essentially global equities and gold. For bonds, as I mentioned up-thread, I now treat them as non-risky assets that are duration matched to our personal planning horizon.

I agree that the sizing of the risk and non-risk portions of the portfolio are a little arbitrary and are based on personal preference for how much opportunity cost one is willing to sacrifice for (near) certainty of matching one’s liabilities, how certain one is of their future liabilities, and how optimistic one is about the future market returns (e.g. the risk portfolio).
I hold market weight in "investable" gold and digital assets.
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Re: Bill Sharpe's preferred portfolio

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exodusing wrote: Fri Jan 26, 2024 9:30 am
invest2bfree wrote: Fri Jan 26, 2024 8:39 amI have totally dumped Government bonds just am focusing diversified portfolio of big cap corporate bonds, which will mature 2044+. Coincides with when Iam getting Social Security Checks when I turn 70.

I get 6.5% yield currently and will get a capital gain when bond matures.

Basically when you have rate at-least 3% higher than government bonds then it pays for the risk you take.
AAA corporates are currently yielding about 5%. A 6.5% yield implies significantly more risk - it's about half way between AAA and junk at 7.9%. There's no guarantee that this additional yield is enough to make up for the risk.
Yes, exodusing is making an important point about risk here.
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager »

It's my understanding that Sharpe wrote RISMAT only for retirees, so I don't know what he recommends for younger investors. I don't think he would recommend tilting to value, for example, but he might allow for higher ratios of world stocks versus world bonds to increase risk.
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Re: Bill Sharpe's preferred portfolio

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pascalwager wrote: Fri Jan 26, 2024 10:36 pm It's my understanding that Sharpe wrote RISMAT only for retirees, so I don't know what he recommends for younger investors. I don't think he would recommend tilting to value, for example, but he might allow for higher ratios of world stocks versus world bonds to increase risk.
I don't think he'd frame it that way.

The market portfolio is the market.

The only difference in retirement is the addition the LMP / lockboxes to replace income, which he'd probably say can forego because you don't need an income stream while you're working.

If you want to increase risk to the market portfolio while working, add leverage.
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager »

watchnerd wrote: Fri Jan 26, 2024 10:47 pm
pascalwager wrote: Fri Jan 26, 2024 10:36 pm It's my understanding that Sharpe wrote RISMAT only for retirees, so I don't know what he recommends for younger investors. I don't think he would recommend tilting to value, for example, but he might allow for higher ratios of world stocks versus world bonds to increase risk.
I don't think he'd frame it that way.

The market portfolio is the market.

The only difference in retirement is the addition the LMP / lockboxes to replace income, which he'd probably say can forego because you don't need an income stream while you're working.

If you want to increase risk to the market portfolio while working, add leverage.
For Sharpe, the market portfolio is good for many retirees, and is a good benchmark for the average investor (including non-retirees). From there, many modifications can be justified. This is based on my reading of The Intelligent Portfolio by Christopher Jones, Sharpe's finance team leader at his former Financial Engines company. Sharpe wrote the Foreword, so I'm considering the basic approach to conform with Sharpe.

For Sharpe, a growth tilt is a performance tilt and a value tilt or EM tilt is a diversification (curve smoothing) tilt.

In reality, Sharpe's preferred portfolio begins with the market portfolio, but may end up with tilts and differing ratios of stocks to bonds.
Also, rebalancing is a requirement, but not conventional, contrarian rebalancing; but, rather, rebalancing that is informed by market movements.
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd »

pascalwager wrote: Sat Jan 27, 2024 2:21 am For Sharpe, the market portfolio is good for many retirees, and is a good benchmark for the average investor (including non-retirees). From there, many modifications can be justified. This is based on my reading of The Intelligent Portfolio by Christopher Jones, Sharpe's finance team leader at his former Financial Engines company. Sharpe wrote the Foreword, so I'm considering the basic approach to conform with Sharpe.

For Sharpe, a growth tilt is a performance tilt and a value tilt or EM tilt is a diversification (curve smoothing) tilt.

In reality, Sharpe's preferred portfolio begins with the market portfolio, but may end up with tilts and differing ratios of stocks to bonds.
Also, rebalancing is a requirement, but not conventional, contrarian rebalancing; but, rather, rebalancing that is informed by market movements.
It sounds like you want to apply Black-Litterman modeling
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager »

watchnerd wrote: Sat Jan 27, 2024 7:48 am
pascalwager wrote: Sat Jan 27, 2024 2:21 am For Sharpe, the market portfolio is good for many retirees, and is a good benchmark for the average investor (including non-retirees). From there, many modifications can be justified. This is based on my reading of The Intelligent Portfolio by Christopher Jones, Sharpe's finance team leader at his former Financial Engines company. Sharpe wrote the Foreword, so I'm considering the basic approach to conform with Sharpe.

For Sharpe, a growth tilt is a performance tilt and a value tilt or EM tilt is a diversification (curve smoothing) tilt.

In reality, Sharpe's preferred portfolio begins with the market portfolio, but may end up with tilts and differing ratios of stocks to bonds.
Also, rebalancing is a requirement, but not conventional, contrarian rebalancing; but, rather, rebalancing that is informed by market movements.
It sounds like you want to apply Black-Litterman modeling
No. FE used Monte Carlo and Reverse Optimization on 15 asset classes (stocks and bonds) that comprised the market portfolio. Each asset class had a risk value (multiples of world market volatility) where the market risk was 1.0, cash 0.2, S&P 500 1.5, etc. This construction provided the flexibility needed to produce both market and non-market portfolios as desired by the client.

(My own stock portfolio began as 2/3 world stock market and 1/3 SCV and EM. For bonds I'm doing duration-matched TIPS, but not an LMP.
Stocks/bonds started out as 60/40. I use the BH GMP link to readjust my two world stock component funds.)
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Re: Bill Sharpe's preferred portfolio

Post by exodusing »

I don't regard writing a foreword to a book by a former employee as an endorsement of all of the contents of the book. Sharpe has a lot of writings and interviews - where has he directly endorsed tilts and explained who should tilt?

"Diversify, diversify, diversify! The closer you come to holding the entire market portfolio, the higher your expected return for the risk you take." https://money.cnn.com/2007/05/21/pf/sha ... /index.htm
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager »

exodusing wrote: Sun Jan 28, 2024 5:44 am I don't regard writing a foreword to a book by a former employee as an endorsement of all of the contents of the book. Sharpe has a lot of writings and interviews - where has he directly endorsed tilts and explained who should tilt?

"Diversify, diversify, diversify! The closer you come to holding the entire market portfolio, the higher your expected return for the risk you take." https://money.cnn.com/2007/05/21/pf/sha ... /index.htm
Not "former" employee. Jones wrote the book for Sharpe as an assignment on weekends and holidays while both he and Sharpe were at FE.

The market portfolio is the most efficient, but some investors may need to tilt for greater expected returns and increased risk or lower volatility and lower expected returns. (I've done the latter.) Sharpe leaves this decision to the investor and his FA.
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Re: Bill Sharpe's preferred portfolio

Post by exodusing »

pascalwager wrote: Sun Jan 28, 2024 4:19 pm
exodusing wrote: Sun Jan 28, 2024 5:44 am I don't regard writing a foreword to a book by a former employee as an endorsement of all of the contents of the book. Sharpe has a lot of writings and interviews - where has he directly endorsed tilts and explained who should tilt?

"Diversify, diversify, diversify! The closer you come to holding the entire market portfolio, the higher your expected return for the risk you take." https://money.cnn.com/2007/05/21/pf/sha ... /index.htm
Not "former" employee. Jones wrote the book for Sharpe as an assignment on weekends and holidays while both he and Sharpe were at FE.

The market portfolio is the most efficient, but some investors may need to tilt for greater expected returns and increased risk or lower volatility and lower expected returns. (I've done the latter.) Sharpe leaves this decision to the investor and his FA.
Whatever. It's not a writing by Sharpe and he's certainly had every opportunity to put forth the thought. Sharpe has been asked a lot about factor investing and I've never seen him say the standard "tilt for greater expected returns and increased risk", although I could easily have missed that statement.

Regarding factor investing, volatility is not a good measure of risk. Cochrane's oft-cited paper is a good explanation.
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd »

exodusing wrote: Sun Jan 28, 2024 5:14 pm
pascalwager wrote: Sun Jan 28, 2024 4:19 pm
exodusing wrote: Sun Jan 28, 2024 5:44 am I don't regard writing a foreword to a book by a former employee as an endorsement of all of the contents of the book. Sharpe has a lot of writings and interviews - where has he directly endorsed tilts and explained who should tilt?

"Diversify, diversify, diversify! The closer you come to holding the entire market portfolio, the higher your expected return for the risk you take." https://money.cnn.com/2007/05/21/pf/sha ... /index.htm
Not "former" employee. Jones wrote the book for Sharpe as an assignment on weekends and holidays while both he and Sharpe were at FE.

The market portfolio is the most efficient, but some investors may need to tilt for greater expected returns and increased risk or lower volatility and lower expected returns. (I've done the latter.) Sharpe leaves this decision to the investor and his FA.
Whatever. It's not a writing by Sharpe and he's certainly had every opportunity to put forth the thought. Sharpe has been asked a lot about factor investing and I've never seen him say the standard "tilt for greater expected returns and increased risk", although I could easily have missed that statement.

Regarding factor investing, volatility is not a good measure of risk. Cochrane's oft-cited paper is a good explanation.
I suspect Sharpe would say that if you want to add more risk to the market portfolio, it would be by adding leverage.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager »

This is the Sharpe Adaptive Asset Allocation Policy (AAAP). It uses old and new fund market values to rebalance. So you need to record market values on your portfolio spreadsheet.

When you do common contrarian rebalancing, you're making an unintentional bet.

https://web.stanford.edu/~wfsharpe/aaap/wfsaaap.pdf

See Formula (15) and Table 7 on page 25.
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd »

pascalwager wrote: Mon Jan 29, 2024 8:44 pm This is the Sharpe Adaptive Asset Allocation Policy (AAAP). It uses old and new fund market values to rebalance. So you need to record market values on your portfolio spreadsheet.

When you do common contrarian rebalancing, you're making an unintentional bet.

https://web.stanford.edu/~wfsharpe/aaap/wfsaaap.pdf

See Formula (15) and Table 7 on page 25.
Thanks!

Will take a read.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager »

pascalwager wrote: Sat Jan 27, 2024 2:21 am
watchnerd wrote: Fri Jan 26, 2024 10:47 pm
pascalwager wrote: Fri Jan 26, 2024 10:36 pm It's my understanding that Sharpe wrote RISMAT only for retirees, so I don't know what he recommends for younger investors. I don't think he would recommend tilting to value, for example, but he might allow for higher ratios of world stocks versus world bonds to increase risk.
I don't think he'd frame it that way.

The market portfolio is the market.

The only difference in retirement is the addition the LMP / lockboxes to replace income, which he'd probably say can forego because you don't need an income stream while you're working.

If you want to increase risk to the market portfolio while working, add leverage.
For Sharpe, the market portfolio is good for many retirees, and is a good benchmark for the average investor (including non-retirees). From there, many modifications can be justified. This is based on my reading of The Intelligent Portfolio by Christopher Jones, Sharpe's finance team leader at his former Financial Engines company. Sharpe wrote the Foreword, so I'm considering the basic approach to conform with Sharpe.

For Sharpe, a growth tilt is a performance tilt and a value tilt or EM tilt is a diversification (curve smoothing) tilt.

In reality, Sharpe's preferred portfolio begins with the market portfolio, but may end up with tilts and differing ratios of stocks to bonds.
Also, rebalancing is a requirement, but not conventional, contrarian rebalancing; but, rather, rebalancing that is informed by market movements.
I was wrong about Sharpe's personal view on tilting for style (as opposed to tilting for tax reasons).

"For Sharpe Jones, a growth tilt is a performance tilt and a value tilt or EM tilt is a diversification (curve smoothing) tilt."

After reading RISMAT, last chapter ("Advice"), Sharpe calls style tilting "betting", not "investing". I think Sharpe wrote the Jones book foreword around 2006, but he shows some growth-market-value performance curves from 2006 to 2016 that don't favor tilting to growth for performance.

In the book, Jones uses "basic economics" (growth's higher correlation to the market) to justify using a growth-oriented portfolio for higher-expected returns and value's lower correlation to the market for lower expected returns. But he doesn't show any style tilts in the many example portfolios.
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager »

exodusing wrote: Sun Jan 28, 2024 5:14 pm
pascalwager wrote: Sun Jan 28, 2024 4:19 pm
exodusing wrote: Sun Jan 28, 2024 5:44 am I don't regard writing a foreword to a book by a former employee as an endorsement of all of the contents of the book. Sharpe has a lot of writings and interviews - where has he directly endorsed tilts and explained who should tilt?

"Diversify, diversify, diversify! The closer you come to holding the entire market portfolio, the higher your expected return for the risk you take." https://money.cnn.com/2007/05/21/pf/sha ... /index.htm
Not "former" employee. Jones wrote the book for Sharpe as an assignment on weekends and holidays while both he and Sharpe were at FE.

The market portfolio is the most efficient, but some investors may need to tilt for greater expected returns and increased risk or lower volatility and lower expected returns. (I've done the latter.) Sharpe leaves this decision to the investor and his FA.
Whatever. It's not a writing by Sharpe and he's certainly had every opportunity to put forth the thought. Sharpe has been asked a lot about factor investing and I've never seen him say the standard "tilt for greater expected returns and increased risk", although I could easily have missed that statement.

Regarding factor investing, volatility is not a good measure of risk. Cochrane's oft-cited paper is a good explanation.
You're correct about Sharpe's view on style tilting. I replied to watchnerd above.
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Re: Bill Sharpe's preferred portfolio

Post by exodusing »

pascalwager wrote: Tue Jan 30, 2024 5:03 pm
exodusing wrote: Sun Jan 28, 2024 5:14 pm
pascalwager wrote: Sun Jan 28, 2024 4:19 pm
exodusing wrote: Sun Jan 28, 2024 5:44 am I don't regard writing a foreword to a book by a former employee as an endorsement of all of the contents of the book. Sharpe has a lot of writings and interviews - where has he directly endorsed tilts and explained who should tilt?

"Diversify, diversify, diversify! The closer you come to holding the entire market portfolio, the higher your expected return for the risk you take." https://money.cnn.com/2007/05/21/pf/sha ... /index.htm
Not "former" employee. Jones wrote the book for Sharpe as an assignment on weekends and holidays while both he and Sharpe were at FE.

The market portfolio is the most efficient, but some investors may need to tilt for greater expected returns and increased risk or lower volatility and lower expected returns. (I've done the latter.) Sharpe leaves this decision to the investor and his FA.
Whatever. It's not a writing by Sharpe and he's certainly had every opportunity to put forth the thought. Sharpe has been asked a lot about factor investing and I've never seen him say the standard "tilt for greater expected returns and increased risk", although I could easily have missed that statement.

Regarding factor investing, volatility is not a good measure of risk. Cochrane's oft-cited paper is a good explanation.
You're correct about Sharpe's view on style tilting. I replied to watchnerd above.
Thank you posting that.
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Re: Bill Sharpe's preferred portfolio

Post by Circle the Wagons »

djm2001 wrote: Sun Jan 21, 2024 11:55 am
As a counterexample to watchnerd and aj76er, I have close to zero personalization -- i.e., I hold no TIPS beyond their tiny market weight; and I hold only a very small amount of I-bonds. I feel comfortable with this because my actual spending is very low relative to my WBS portfolio balance (< 2% WR). Maybe some day I'll exchange a portion of my WBS for a duration-matched TIPS ladder, but at the moment I'm happy eating the average stock and bond market return, even given the cumulative negative real return spanning the last 2-3 years.
Do you see yourself as having a risk appetite that just happens to align to ~100% WBS with minimal risk-free asset, or more so that you're somewhere on a broad plateau caused by inefficiencies in implementing Sharpe's philosophy in the real world (e.g., excessive leverage costs if you should be riskier, or just haven't gotten around to the LMP if you should be less risky)?
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

Circle the Wagons wrote: Sun Feb 11, 2024 10:21 am
djm2001 wrote: Sun Jan 21, 2024 11:55 am
As a counterexample to watchnerd and aj76er, I have close to zero personalization -- i.e., I hold no TIPS beyond their tiny market weight; and I hold only a very small amount of I-bonds. I feel comfortable with this because my actual spending is very low relative to my WBS portfolio balance (< 2% WR). Maybe some day I'll exchange a portion of my WBS for a duration-matched TIPS ladder, but at the moment I'm happy eating the average stock and bond market return, even given the cumulative negative real return spanning the last 2-3 years.
Do you see yourself as having a risk appetite that just happens to align to ~100% WBS with minimal risk-free asset, or more so that you're somewhere on a broad plateau caused by inefficiencies in implementing Sharpe's philosophy in the real world (e.g., excessive leverage costs if you should be riskier, or just haven't gotten around to the LMP if you should be less risky)?
The latter. Nobody is perfectly average, but I don't know exactly where I should sit on the capital market line / efficient frontier. How much leverage (or TIPS ladder) is right for me? I have no idea -- I have a low withdrawal rate but on the other hand I retired early. I am also daunted by the costs and headache of deviating (via leverage or TIPS ladder). Until I have an epiphany about which direction to go and how far, I'll sit at the average (i.e., WBS) because it's easy and cheap.

Btw, I should clarify that I do hold a small amount of TIPS fund (as opposed to ladder) as part of an expanded version of WBS that fills in some gaps missing from BND -- TIPS, munis, and high-yield. Each of these is a small sliver. TIPS market cap is roughly 1-1.5% of this expanded WBS. Note that holding TIPS as part of WBS is not a contradiction -- while in theory the risk-free asset has net zero supply (and so is absent from WBS), in practice TIPS are not perfectly risk-free (e.g., Treasury default risk, mismatch between CPI-U and actual consumption) and there is a cost to shorting, and so we can expect TIPS to have a slightly positive net supply (and thus appear in WBS).
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
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Re: Bill Sharpe's preferred portfolio

Post by Circle the Wagons »

djm2001 wrote: Sun Feb 11, 2024 12:16 pm
Circle the Wagons wrote: Sun Feb 11, 2024 10:21 am
djm2001 wrote: Sun Jan 21, 2024 11:55 am
As a counterexample to watchnerd and aj76er, I have close to zero personalization -- i.e., I hold no TIPS beyond their tiny market weight; and I hold only a very small amount of I-bonds. I feel comfortable with this because my actual spending is very low relative to my WBS portfolio balance (< 2% WR). Maybe some day I'll exchange a portion of my WBS for a duration-matched TIPS ladder, but at the moment I'm happy eating the average stock and bond market return, even given the cumulative negative real return spanning the last 2-3 years.
Do you see yourself as having a risk appetite that just happens to align to ~100% WBS with minimal risk-free asset, or more so that you're somewhere on a broad plateau caused by inefficiencies in implementing Sharpe's philosophy in the real world (e.g., excessive leverage costs if you should be riskier, or just haven't gotten around to the LMP if you should be less risky)?
The latter. Nobody is perfectly average, but I don't know exactly where I should sit on the capital market line / efficient frontier. How much leverage (or TIPS ladder) is right for me? I have no idea -- I have a low withdrawal rate but on the other hand I retired early. I am also daunted by the costs and headache of deviating (via leverage or TIPS ladder). Until I have an epiphany about which direction to go and how far, I'll sit at the average (i.e., WBS) because it's easy and cheap.

Btw, I should clarify that I do hold a small amount of TIPS fund (as opposed to ladder) as part of an expanded version of WBS that fills in some gaps missing from BND -- TIPS, munis, and high-yield. Each of these is a small sliver. TIPS market cap is roughly 1-1.5% of this expanded WBS. Note that holding TIPS as part of WBS is not a contradiction -- while in theory the risk-free asset has net zero supply (and so is absent from WBS), in practice TIPS are not perfectly risk-free (e.g., Treasury default risk, mismatch between CPI-U and actual consumption) and there is a cost to shorting, and so we can expect TIPS to have a slightly positive net supply (and thus appear in WBS).
Thanks for the reply. Your approach is interesting because I'm a bit stuck myself, but from the opposite direction. I have more certainty around LMP strategy, though with a few open tactical questions (eg, how to align TIPS funds duration with munis, where I've traded off some inflation protection for tax protection).

But I'm struggling with defining the right WBS, specifically the fixed income portion. I am giving strong consideration to watchnerd's approach as a middle ground between too much gov't fixed income (therefore too conservative, given the LMP) and just going all stock for the WBS.

Haven't earned my definitive AA signature line here yet.
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

Circle the Wagons wrote: Sun Feb 11, 2024 2:41 pm But I'm struggling with defining the right WBS, specifically the fixed income portion. I am giving strong consideration to watchnerd's approach as a middle ground between too much gov't fixed income (therefore too conservative, given the LMP) and just going all stock for the WBS.
Even if you drop government bonds, I support watchnerd's middle ground of including corporate bonds in your implementation of WBS.

Opinions are divided on government bonds with reasonable arguments both ways. But the case for including corporate bonds in WBS is more clear cut. Some portion of earnings goes toward paying corporate bond interest. So you need to be a bondholder as well as a shareholder in order to receive the full public claim on corporate earnings. (In fact, as a shareholder you effectively own part of the liability for the debt with none of the upside, and issuance of new corporate bonds correspondingly decreases share price.) More info in the Components of the Market Portfolio section of Sharpe's RISMAT Chapter 7.

In addition to theoretical/philosophical arguments for corporate bonds, corporate bonds have empirically higher correlation to equities and have higher coupon rates than Treasuries while still providing bond advantages (e.g., payout predictability, repayment priority over shareholders). Moreover, they are a much smaller proportion of WBS than the whole aggregate bond market. So you won't feel as risk-averse if you hold them at their market weight.
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
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Re: Bill Sharpe's preferred portfolio

Post by Circle the Wagons »

djm2001 wrote: Sun Feb 11, 2024 4:10 pm
Circle the Wagons wrote: Sun Feb 11, 2024 2:41 pm But I'm struggling with defining the right WBS, specifically the fixed income portion. I am giving strong consideration to watchnerd's approach as a middle ground between too much gov't fixed income (therefore too conservative, given the LMP) and just going all stock for the WBS.
Even if you drop government bonds, I support watchnerd's middle ground of including corporate bonds in your implementation of WBS.

Opinions are divided on government bonds with reasonable arguments both ways. But the case for including corporate bonds in WBS is more clear cut. Some portion of earnings goes toward paying corporate bond interest. So you need to be a bondholder as well as a shareholder in order to receive the full public claim on corporate earnings. (In fact, as a shareholder you effectively own part of the liability for the debt with none of the upside, and issuance of new corporate bonds correspondingly decreases share price.) More info in the Components of the Market Portfolio section of Sharpe's RISMAT Chapter 7.

In addition to theoretical/philosophical arguments for corporate bonds, corporate bonds have empirically higher correlation to equities and have higher coupon rates than Treasuries while still providing bond advantages (e.g., payout predictability, repayment priority over shareholders). Moreover, they are a much smaller proportion of WBS than the whole aggregate bond market. So you won't feel as risk-averse if you hold them at their market weight.
I find these points pretty compelling.

But I'm stuck on pesky practical considerations. My LMP sucks up all my tax advantaged space; indeed it bleeds over into taxable in the form of munis. So the RP would be in taxable. Corporate bonds aren't so tax efficient. And VGCAX expense ratio is a little high (I already cringe at what LTPZ charges me).
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Re: Bill Sharpe's preferred portfolio

Post by buyer »

@djm2001

I just noticed your Google sheet now includes the HYG and TIP bond ETFs in the ITOT/IXUS stock pie chart. I was wondering if there's a reason for that, or if it's perhaps an error?
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

buyer wrote: Mon Feb 12, 2024 3:22 am @djm2001

I just noticed your Google sheet now includes the HYG and TIP bond ETFs in the ITOT/IXUS stock pie chart. I was wondering if there's a reason for that, or if it's perhaps an error?
It was an error. I recently added tracking for FTSE market caps for TIPS and HY because I noticed they were significantly different from S&P's numbers. (Haven't yet figured out which of the two is correct... :confused ) That particular pie chart automatically included those new rows. Fixed now. Thanks for the heads up.
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
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Re: Bill Sharpe's preferred portfolio

Post by aj76er »

djm2001 wrote: Sun Feb 11, 2024 4:10 pm
Circle the Wagons wrote: Sun Feb 11, 2024 2:41 pm But I'm struggling with defining the right WBS, specifically the fixed income portion. I am giving strong consideration to watchnerd's approach as a middle ground between too much gov't fixed income (therefore too conservative, given the LMP) and just going all stock for the WBS.
Even if you drop government bonds, I support watchnerd's middle ground of including corporate bonds in your implementation of WBS.

Opinions are divided on government bonds with reasonable arguments both ways. But the case for including corporate bonds in WBS is more clear cut. Some portion of earnings goes toward paying corporate bond interest. So you need to be a bondholder as well as a shareholder in order to receive the full public claim on corporate earnings. (In fact, as a shareholder you effectively own part of the liability for the debt with none of the upside, and issuance of new corporate bonds correspondingly decreases share price.) More info in the Components of the Market Portfolio section of Sharpe's RISMAT Chapter 7.

In addition to theoretical/philosophical arguments for corporate bonds, corporate bonds have empirically higher correlation to equities and have higher coupon rates than Treasuries while still providing bond advantages (e.g., payout predictability, repayment priority over shareholders). Moreover, they are a much smaller proportion of WBS than the whole aggregate bond market. So you won't feel as risk-averse if you hold them at their market weight.
Those are nice philosophical points, but the bottom line is that corporations, in aggregate, cannot borrow more than they earn over any appreciable length of time. Therefore, as a long-term buy-and-hold investor (over many decades), holding corporate bonds simply lowers your total return. Furthermore, since credit risk is highly correlated to equity risk, you get no meaningful protection during equity drawdowns.

Besides the above points, practical implementation of holding world corporate bonds is problematic, as there is only one such fund (with highish expense ratio), and corporate bonds are not tax friendly so they need to be placed in limited tax advantaged space.

Personally, I think a VT risk portfolio + TIPS/Cash LMP is a more viable option.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
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Re: Bill Sharpe's preferred portfolio

Post by Circle the Wagons »

aj76er wrote: Mon Feb 12, 2024 9:13 am
djm2001 wrote: Sun Feb 11, 2024 4:10 pm
Circle the Wagons wrote: Sun Feb 11, 2024 2:41 pm But I'm struggling with defining the right WBS, specifically the fixed income portion. I am giving strong consideration to watchnerd's approach as a middle ground between too much gov't fixed income (therefore too conservative, given the LMP) and just going all stock for the WBS.
Even if you drop government bonds, I support watchnerd's middle ground of including corporate bonds in your implementation of WBS.

Opinions are divided on government bonds with reasonable arguments both ways. But the case for including corporate bonds in WBS is more clear cut. Some portion of earnings goes toward paying corporate bond interest. So you need to be a bondholder as well as a shareholder in order to receive the full public claim on corporate earnings. (In fact, as a shareholder you effectively own part of the liability for the debt with none of the upside, and issuance of new corporate bonds correspondingly decreases share price.) More info in the Components of the Market Portfolio section of Sharpe's RISMAT Chapter 7.

In addition to theoretical/philosophical arguments for corporate bonds, corporate bonds have empirically higher correlation to equities and have higher coupon rates than Treasuries while still providing bond advantages (e.g., payout predictability, repayment priority over shareholders). Moreover, they are a much smaller proportion of WBS than the whole aggregate bond market. So you won't feel as risk-averse if you hold them at their market weight.
Those are nice philosophical points, but the bottom line is that corporations, in aggregate, cannot borrow more than they earn over any appreciable length of time. Therefore, as a long-term buy-and-hold investor (over many decades), holding corporate bonds simply lowers your total return. Furthermore, since credit risk is highly correlated to equity risk, you get no meaningful protection during equity drawdowns.

Besides the above points, practical implementation of holding world corporate bonds is problematic, as there is only one such fund (with highish expense ratio), and corporate bonds are not tax friendly so they need to be placed in limited tax advantaged space.

Personally, I think a VT risk portfolio + TIPS/Cash LMP is a more viable option.

Real-life humans like myself might still feel stuck. It seems you can make a strong argument for at least three broad versions of the WBS:

100% equities -- the other stuff doesn't meaningfully move the needle; an LMP is enough exposure to bonds

about 75/25 -- you should at least have corporate credit exposure, maybe gold etc.

about 60/40 -- true market weight including gov't bonds

I know this could be viewed as backward, but in my mind, each of these would imply a different sized LMP. Can't ignore the riskiness of the RP when sizing the safe income floor. Each above definitely has a different expected risk / return.

If the goal is a set level of overall portfolio risk at maximum efficiency, the answer still feels pretty fuzzy.
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Re: Bill Sharpe's preferred portfolio

Post by guppyguy »

Personally I believing that thinking in percentages, while a useful descriptive, is poor at adapting models to real life consumption. I resolve the bonds portion of Sharpe's portfolio to both short and long term liabilities:
Short liabilities - expenses within the next 12 months in treasuries/CDs/MMF/cash
Long liabilities - TIPS laddered as an added floor above Social Security/Pension

Everything else in between is: VT

What the translates to in percentages and how it relates to WBS model doesn't matter.
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Re: Bill Sharpe's preferred portfolio

Post by Circle the Wagons »

guppyguy wrote: Sat Feb 17, 2024 11:17 am Personally I believing that thinking in percentages, while a useful descriptive, is poor at adapting models to real life consumption. I resolve the bonds portion of Sharpe's portfolio to both short and long term liabilities:
Short liabilities - expenses within the next 12 months in treasuries/CDs/MMF/cash
Long liabilities - TIPS laddered as an added floor above Social Security/Pension

Everything else in between is: VT

What the translates to in percentages and how it relates to WBS model doesn't matter.
Thanks and appreciate the example.

This is effectively the "100% equity RP over high LMP floor" option. I'm leaning that way too, but some would argue that RP is at least somewhat less efficient (risk/return) than a more nuanced allocation. And/or that the LMP is too big/conservative vs. optimal. Can't assume a personalized LMP appropriately accounts for the non-stock portion of the WBS.
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Re: Bill Sharpe's preferred portfolio

Post by longinvest »

This post documents the monthly return and asset-class weights as of January 31, 2024 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 January 2024 return was:
  • Global Stock-and-Bond Portfolio: ((60.92% X 0.01% (global stocks)) + (39.08% X -0.38% (global bonds))) = -0.14% (USD)
    • Global stocks: Vanguard Total World Stock ETF (VT) NAV return
    • Global bonds: Vanguard Total World Bond ETF (BNDW) NAV return
As of January 31, 2024 the weights were:
  • Global stocks: $75,411,745 million USD Market cap -- 60.88%
    • FTSE Global All Cap Index (GEISLMS) -- Net MCap
  • Global bonds: $48,453,540 million USD Market cap -- 39.12%
    • 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 January 2024 return was -0.13%.

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 January 31, 2024:

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Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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aj76er
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Re: Bill Sharpe's preferred portfolio

Post by aj76er »

Circle the Wagons wrote: Sat Feb 17, 2024 1:01 pm And/or that the LMP is too big/conservative vs. optimal.
I don't understand why one's LMP would be too big/conservative vs optimal?

You can fine-tune the LMP to match your core living expenses, which should be fairly predictable. For example, say you have a paid-off residence with predictable HOA, Property Taxes, and Insurance costs; and you have predictable grocery bills (i.e. you know what you like to cook/eat). This part of a person's budge is both highly personal, and highly correlated to inflation. Thus, right-sizing a TIPS/Ibonds LMP (at least for U.S.-based investors) makes a lot of sense.

After you setup an LMP with a decent sized portion of the portfolio, it makes sense to go for maximum return with the RP - hence, 100% VT. Using nominal bonds as a ballast here is fine, I guess; but historically it has been suboptimal over long-ish periods of time because of strong mean-reversion tendencies of stocks. So, what do you believe about the future? If you don't believe that stocks will outperform bonds, and you don't trust the mean-reversion tendencies of stocks, then maybe psychologically it makes sense to dilute with nominals and just go full WBS bond/stock for the RP. But in doing so, you are ignoring the historical record of such an asset allocation vs. something with higher returns over 30, or 40 years.

Anyway, that's how I reason about it.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
pascalwager
Posts: 2266
Joined: Mon Oct 31, 2011 8:36 pm

Re: Bill Sharpe's preferred portfolio

Post by pascalwager »

aj76er wrote: Sat Feb 17, 2024 5:15 pm
Circle the Wagons wrote: Sat Feb 17, 2024 1:01 pm And/or that the LMP is too big/conservative vs. optimal.
I don't understand why one's LMP would be too big/conservative vs optimal?

You can fine-tune the LMP to match your core living expenses, which should be fairly predictable. For example, say you have a paid-off residence with predictable HOA, Property Taxes, and Insurance costs; and you have predictable grocery bills (i.e. you know what you like to cook/eat). This part of a person's budge is both highly personal, and highly correlated to inflation. Thus, right-sizing a TIPS/Ibonds LMP (at least for U.S.-based investors) makes a lot of sense.

After you setup an LMP with a decent sized portion of the portfolio, it makes sense to go for maximum return with the RP - hence, 100% VT. Using nominal bonds as a ballast here is fine, I guess; but historically it has been suboptimal over long-ish periods of time because of strong mean-reversion tendencies of stocks. So, what do you believe about the future? If you don't believe that stocks will outperform bonds, and you don't trust the mean-reversion tendencies of stocks, then maybe psychologically it makes sense to dilute with nominals and just go full WBS bond/stock for the RP. But in doing so, you are ignoring the historical record of such an asset allocation vs. something with higher returns over 30, or 40 years.

Anyway, that's how I reason about it.
When you use BNDW along with VT in market proportions, then you own the most efficient portfolio according to market theory. You're not making any bets. Sharpe considers this investing as opposed to gambling.
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