Global Market Portfolio

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IlliniDave
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Re: Global Market Portfolio

Post by IlliniDave » Mon Jan 04, 2016 10:39 am

BRUTE wrote: @IlliniDave:

regarding the currency risk: is it not better, from a diversification standpoint, to hold the majority of one's assets in a currency different from one's place of residence? brute certainly didn't want to be a russian holding russian assets when the ruble tanked. of course many currencies are highly interrelated. but isn't a currency linked even more to the assets denominated in that currency, which are usually located within the economy using that currency?

maybe it's smart to diversify across currencies as well? or is the advantage outweighed by the cost, tax issues, and inconvenience?
I really don't know the answer to any of your questions.

For an equity investor in the US, when the dollar rises relative to other currencies it tends to lower returns on non-US investments and when the dollar falls relative to other currencies, it tends to raise returns of non-US equities. That's usually what is meant when people talk about currency risk relative to equity investments, and is probably true for bonds as well. Most (maybe all) US investors buy and sell in dollars, and receive income distributions in dollars, even when the equities are non-US and the companies operate with different currencies. Dollars relative to the various foreign currencies are another layer of volatility, and I don't know if there is much of a risk premium associated with taking on that additional "risk".

I don't actually own any foreign currency except a little residual pocket money leftover from a trip to Canada a number of years back. I don't know all the pros/cons of holding different currencies. I suppose the trick for a US investor would be finding some that share the reliability of the USD that would be immune to/decoupled from some sort of cataclysmic problem with the USD. I suppose citizens of a smaller sovereignty with a bit more flimsy of a local currency might want to have a reserve of Euros or USDs if they can legally do so.

Perhaps if I lived somewhere where the local currency was not USD I would have given this more thought. It will be interesting if anyone more knowledgeable on currency investing/hedging decides to add anything.

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BlueNote
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Re: Global Market Portfolio

Post by BlueNote » Mon Jan 04, 2016 7:24 pm

BRUTE wrote: to be honest, brute is still on the fence. his previous "optimal strategy" was 75/25 of US/ex-US equity. but ever since reading about the GMP (inspired by this thread!), brute's mind keeps churning at this idea, casting more and more doubt.

This seems to happen to everyone who seriously delves into DIY investing. I've personally been through 2 investing strategies and am currently on my 3rd (and hopefully last). As for currency I see it as a medium of exchange and not something to invest in per se. Therefore one could just as easily make a strong USD argument as they could a weak one. However if one lives in the US then a strong USD bias may be warranted because most of the things you're buying are denominated in USD. On the other hand the GMB is incredibly diversified and is likely to experience some smoothing of exchange rate fluctuations compared to the fluctuations between individual currencies. The problem with bonds is that their gains/losses are often overridden by the much more volatile currency fluctuations. So perhaps a hedged approach would be better because it helps isolate the bonds market risk from currency risk.

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BRUTE
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Re: Global Market Portfolio

Post by BRUTE » Mon Jan 04, 2016 9:39 pm

at this point, brute is still too chicken to implement the GMP. if any of the humans use it and gain some insights, he would be glad to learn from them.

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FBeyer
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Re: Global Market Portfolio

Post by FBeyer » Wed Jan 06, 2016 5:33 am

BlueNote wrote:... I've personally been through 2 investing strategies and am currently on my 3rd (and hopefully last)...
How do you mentally separate your tendency to change strategies from market-timing and recency based scares, to analytically, theoretically well founded improvements on your current investing strategy?

Knowing myself I figured that I am susceptible to changing strategies (my brain is all monkeys from time to time) and I am very curious how one decides that a change of strategy is the right thing to do, not just a fluke of recency.

What strategies have you switched away from?

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BlueNote
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Re: Global Market Portfolio

Post by BlueNote » Wed Jan 06, 2016 7:50 pm

FBeyer wrote:
Knowing myself I figured that I am susceptible to changing strategies (my brain is all monkeys from time to time) and I am very curious how one decides that a change of strategy is the right thing to do, not just a fluke of recency.

What strategies have you switched away from?
That's a good question. Recency bias "is the tendency to think that trends and patterns we observe in the recent past will continue in the future."

So here is a story from the ghost of my investment past.

My first investment strategy is simple dollar cost averaging into a diversified mix of stocks and bonds (essentially an index portfolio). I still follow this strategy because, to me, it is the most rational way to invest in the matching program my employer offers. So I have a portfolio right now worth about $30K CAD that just runs on auto pilot. I don't even know the exact net worth of it, I just keep DCAing into the portfolio, it is deposited automatically form my paycheque. It's invested in a target date fund right now, so it's really simple and boring.

My second investment strategy, with my own unencumbered investing capital, was briefly a "buy good companies" type of system. I ended up owning things like JNJ and Berkshire Hathaway. I tended to like stocks that had a solid history of dividend growth and "wide moats". I was very much a novice at this point but looking back it was not a terrible strategy. It was sort of a bastardized dividend growth portfolio. There was nothing inherently wrong with the stocks I held (blue chips) but I switched from this strategy.

I then switched to the PP (permanent portfolio), 1/4 domestic stocks, 1/4 domestic long gov bonds, 1/4 gold, 1/4 domestic short gov bonds. This portfolio wasn't a good fit with my personality as I was uncomfortable with the gold component.

I switched from the PP to a dividend growth portfolio. I based my picks on a slew of criteria that I filtered from dividend growth stock lists (google David Fish and Canadian dividend All Stars). In order to feel comfortable with this investment strategy I was reading the annual reports for all the companies I invested in and following their performance metrics. This was a drag for me, not a fun hobby. I ended up learning that I was comfortable owning stock in companies that were in the consumer non-durables sector with very strong brands, strong financials and solid dividend growth history. On top of that I have kept my Berkshire hathaway stock. After reading 25+ years of Berkshire annual reports I feel like I know enough about the company to invest intelligently.

I tend to keep an open mind on investing and spend a large part of my reading in this area. I came across factors and, in particular, the momentum factor. I researched it and read tons of Internet articles and a few books on the topic.

My money is currently split between 3.25 portfolios

Portfolio 1 is the employer matching portfolio previously mentioned.

Portfolio 2 is an "ivy" portfolio that I created based on Meb Fabers famous Ivy 5 timing portfolio. So far it has worked very well because it has kept me out of the Canadian bear stock market and has kept me in the non-canadiana stock market which has made gains mostly due to currency. The timing component is totally mechanical, I use a spreadsheet to tell me what to buy and sell each month based on the 200 day moving average of each security.

Portfolio 3 uses dual momentum (GEM) which has recently (since 2009) performed worse than indexing the S&P 500. However I think there's a really good chance it will do well over a full market cycle as the portfolio is designed to get one out of a bear market early. Whipsaws and flash crashes (like 1987) are threats to this strategy over the short and medium term. If most of our future bear markets are characterized by 1987 type stock market crashes then this strategy will suck. Also whipsaws (buying high and seeing low on false signals) can slowly erode capital. I have been whipsawed once and will likely be many more times following this type of a strategy. It's supposed to be a good strategy over market cycles.

Portfolio .25 is my Berkshire hathaway stock which I consider buying more of when the price is below 1.3x book value.

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BRUTE
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Re: Global Market Portfolio

Post by BRUTE » Wed Jan 06, 2016 10:50 pm

FBeyer wrote:
BlueNote wrote:... I've personally been through 2 investing strategies and am currently on my 3rd (and hopefully last)...
How do you mentally separate your tendency to change strategies from market-timing and recency based scares, to analytically, theoretically well founded improvements on your current investing strategy?
brute would argue that even "picking and sticking to" one single strategy is market timing, unless one can somehow prove that this strategy works without making use of technical/fundamental insights.

IlliniDave
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Re: Global Market Portfolio

Post by IlliniDave » Thu Jan 07, 2016 5:58 am

The question wasn't addressed to me but here goes anyway.

Initially I was what you'd call a performance-chaser when it came to stocks: invest in the funds that had strong recent past performance. My company's 401k essentially forced me in to this because they kept a selection of funds in the plan based on Morning Star rating, so any funds that faded they removed and replaced with something else in the 4- or 5-* range. Then a couple years ago they overhauled the plan to be primarily low cost income funds. Someone in a decision-making position turned boglehead, which in turn forced me to to look into the topic, and I was ultimately converted.

So my strategy now is to no longer try to pick "winners", either individual companies or fund managers. I just invest in publicly traded companies all over the world seeking only to gain the largest share I can (through low ERs) of their profit and growth in proportion to the money I put at risk. The folks who like to skim 1% or more of your wealth every year successfully perpetrated a myth that success was nothing less than "beating the market", which if you think about it is patently false, and ironically the pursuit of "winning", because of the cost involved, guarantees the majority of investors "lose".

So I have sort of an anti-strategy.

In the interest of full disclosure I do have small tilts towards US small cap and emerging markets (I hold them in slightly larger proportions than a pure market-cap weighting would call for). I hold 25%-30% in US bonds. And I have a tiny Roth IRA that is my play space where I hold an eclectic collection of things I play around with where I'm trying to assemble some things with relatively low correlation to see how I can do with tactical rebalancing.

But I'm 90%+ on the boglehead continuum and will probably stay there and just profit to whatever extent the world profits.

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BlueNote
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Re: Global Market Portfolio

Post by BlueNote » Thu Jan 07, 2016 7:18 pm

BRUTE wrote:
FBeyer wrote:
BlueNote wrote:... I've personally been through 2 investing strategies and am currently on my 3rd (and hopefully last)...
How do you mentally separate your tendency to change strategies from market-timing and recency based scares, to analytically, theoretically well founded improvements on your current investing strategy?
brute would argue that even "picking and sticking to" one single strategy is market timing, unless one can somehow prove that this strategy works without making use of technical/fundamental insights.
The terms "market timing" or "timing the market" lack a clear shared definition. It's become an overused term IMHO. I think it would be better to simply describe the system you're using and why you like it. To some anything but the GMP is market timing, to others timing means something much more narrow like buying a stock because you think it's hit bottom.

I was thinking that the GMP might be a good base to start with and one could tweak this portfolio to match their personal needs.

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FBeyer
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Re: Global Market Portfolio

Post by FBeyer » Fri Jan 08, 2016 4:03 am

BlueNote wrote:The terms "market timing" or "timing the market" lack a clear shared definition...
True, but buy-and-hold basically relies on historical market trends and autocorrelations, stretching back about 90 years. Buy low-now and sell high-now, kind of market timing, relies on recency and mixing with external factors, such as small political events as well as the agitation of other equally agitated 'would-be-quants'. We can't lump everything together in the market timing bin just because it has a temporal aspect to it.

Those of us who do no own a shred of economic envy will naturally choose long-term strategies, because we favour stability (or rather, unexciting investing) and income-per-hour-spent-on-managing-finances, compared to those who's like to make investing their day job. Managing portfolio stability is then another topic.

You can do a sort of hypothesis test of the two methods and find that the former passes up to a higher significance threshold. You can also choose to ignore the efficiency of the method and rely on the variance of the model swinging in your favour.

So far I've found that it's quite clear from context what kind of market timing were talking about, but it must be said that I am completely new to investing, so I'll have to trust you that the question of what kind of timing a given investor makes use of might be unclear.

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BRUTE
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Re: Global Market Portfolio

Post by BRUTE » Fri Jan 08, 2016 11:45 am

maybe it is of use to define market timing as a percentage instead of through a binary (unclear) term. someone who owns a single stock for a day might be at 100% market timing. someone who buys and holds the GMP forever might be 0%.

or categories might be more useful: day trader, hobbyist, boglehead, GMP. until humans invent something beyond the GMP.

interesting point: is it even possible to own securities in a way that actually completely eliminates any decisions by the investor, kind of like the indexing philosophy claims/is viewed? for this, consider that even picking a strategy is a decision, just as picking a fund manager is a decision. can there be a strategy to end all strategies?

can this be mathematically proven or disproven?

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BlueNote
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Re: Global Market Portfolio

Post by BlueNote » Tue Jan 12, 2016 9:35 pm

I have updated the google spreadsheetwith a couple of new items based on some more research.

1: GMP Lower Cost version

This is a lower cost version of the original GMP (global market portfolio). The portfolio names are the same as the sheet names on the spreadsheet. It has an weighted average expense ratio of .20% which is 31% ($90 per $100k per year) lower than the original GMP.

2: Bid Ask Spreads

For those who don't know what bid and ask prices are, here is the short version. The bid price is the price which you can immediately sell shares, the ask price the price which you can immediately buy shares. If you paid no taxes or commissions and tried to buy some shares and sell them back to the stock market at the same time you'd still lose money because of the bid ask spread, therefore it is a real unavoidable cost. The bid ask spread is usually wider on low volume shares and thus makes trading stock in things like exotic ETF's, small/micro cap stocks and new issue ETF's more expensive.

Right now the bid ask spread data in my spreadsheet is wrong because I am getting market data from Yahoo! and the markets are closed. I'll lock in some bid ask spreads during tomorrows market and that'll give us an idea of the hidden cost of buying these securities. In particular the ITIP product seemed to have a very large bid ask spread compared to the other ETF's, it's thinly traded.

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BRUTE
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Re: Global Market Portfolio

Post by BRUTE » Thu Jan 14, 2016 1:27 am

brute tried to backtest both variants, but some of the funds only go back to 2014, so there really wasn't much to see. since 2014, the GMP definitely lost big time compared to the S&P500. it's still up, but not nearly as much. then again, that's a very short time frame to compare an indexing strategy.

brute thinks one could backtest the categories, i.e. us stocks, us bonds, emerging stocks, emerging bonds, .. instead of the actual, specific ones.

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BlueNote
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Re: Global Market Portfolio

Post by BlueNote » Fri Jan 15, 2016 7:05 pm

BRUTE wrote:
brute thinks one could backtest the categories, i.e. us stocks, us bonds, emerging stocks, emerging bonds, .. instead of the actual, specific ones.
Quite a few index mutual funds have been around since the 70's and 80's. They work well for a backtest, but I think if you search around enough you'll find that someone has probably already done the GMP backtest and published results.

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BRUTE
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Re: Global Market Portfolio

Post by BRUTE » Sat Jan 16, 2016 12:14 am

brute could not find one just now.

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BRUTE
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Re: Global Market Portfolio

Post by BRUTE » Mon Jan 18, 2016 10:24 pm

brute has read Meb Faber's Global Asset Allocation. faber compares various well-known portfolios and backtests their performance from 1973 to 2013. among it the GMP (developed markets sovereign bonds 24%, emerging markets equities 9%, dm equities 32%, em corporate bonds 4%, dm corporate bonds 27%, em sovereign bonds 4%).

here are his results (1973-2013):

nominal return: 9.9%
volatility: 8.45%
sharpe ratio: 0.55
max drawdown: -26.87%

one thing that's interesting in this little book is that almost all the compared portfolios had almost the same returns and volatility. with the exception of the permanent portfolio (which did well during high inflationary times but terrible at all other times), all the nominal returns range between 9.5% and 10.45%. and even the PP does 8.53%, so not terribly far off.

fabers conclusion is that unless you just take your money out of any assets at all (which the PP does to 25%-50%, depending if you count gold as an asset), the specific asset allocation in different asset classes does not seem to matter much.

he emphasizes that international diversification and low fees are more important. a 1% fee will take you from the winning portfolio (10.45%) to below the losing portfolio (9.45% vs 9.5%, again excluding the PP at 8.53%).

it kind of makes sense to brute. there are only so many asset classes (equities, gov bonds, corp bonds, real estate, cash equivalents, precious metals, commodities) that one can diversify across. almost all of them (except cash) thrive in certain environments, and fail in others. how these environments occur throughout a period of time is unknowable ex-ante. so as long as one is even reasonably diversified across the asset classes (let's say 3+ classes), that's about as well as one can do.

the tiny differences in volatility and average return can easily explained by the random occurrence of the investment environments of the period one is examining.

brute concludes that yes, theoretically, the GMP is optimally diversified, especially because of the G part, which many other portfolios lack. but in practice, the advantage compared to most simple all weather portfolios is smaller than statistical noise.

if there exists a pre-packaged low-cost GMP etf, brute would probably buy it as his only investment source.

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BlueNote
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Re: Global Market Portfolio

Post by BlueNote » Sun Jan 31, 2016 12:40 pm

@Brute. I knew I saw those figures somewhere before.

Have you also read Meb's paper where he looks into market timing filters as a layer on top of a globally diversified portfolio?: A Quantitative Approach to Tactical Asset Allocation

He also wrote a book about portfolio construction that uses broad internationally diversified asset classes: The Ivy Portfolio


After reading these works I ended up getting into other white papers and books around the topics of diversification, momentum, timing filters, etc.

It's pretty interesting stuff if you're into that sort of thing.

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Re: Global Market Portfolio

Post by jacob » Sun Jan 31, 2016 1:10 pm

Also consider that the market is now very much globalized while MPT and rebalancing has become dominantly popular strategies. One should, therefore, naturally expect a convergence to similar performances in all asset classes. It's a consequence of diminishing strategy-diversification. See the recent rebalancing thread for TMI along those lines.

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BlueNote
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Re: Global Market Portfolio

Post by BlueNote » Tue Jan 31, 2017 7:06 pm

I updated the link to the example GMP I made in google sheets: https://docs.google.com/spreadsheets/d/ ... sp=sharing

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Re: Global Market Portfolio

Post by ThisDinosaur » Wed Mar 08, 2017 10:28 am

If the price change component of total return is optimized by owning an asset *before* the unwashed masses want to buy it, wouldn't it make sense to own mainly the smallest components of the investable GMP? Like, if GMP represents the aggregate average investor's preferences, sooner or later they will rush out of stocks and bonds and into some other investable asset. So allocating to the *underrepresented* REITs, TIPS, EM debt like a contrarian should ultimately win, yes?

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BRUTE
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Re: Global Market Portfolio

Post by BRUTE » Wed Mar 08, 2017 1:08 pm

all on small cap growth?

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