Global Market Portfolio

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BlueNote
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Re: Global Market Portfolio

Post by BlueNote » Wed Mar 15, 2017 9:19 pm

@ThisDinosaur

The GMP strategy assumes:

- Stocks, bonds and real estate are investment assets, everything else isn't or is simply a derivative of those asset classes.
- You can't pick stocks/bonds/real estate and expect to beat the market (on a risk adjusted basis) because the market is the sum total of all investment decisions and you're never going to be as smart, adaptable and sophisticated as the market.
- The more diversification the better
- You can't even do an asset allocation better then the market so you should just let the market do that too.

The GMP has all sorts of implementation issues for the 'average' investor though. For example:

- Exchange rates are way more volatile than bond values and can also overwhelm stock and real estate values. Currency hedging comes at a cost of the effort/time of implementing it, the cost of the hedging securities and the risk that it won't work as planned.

- Taxes vary in different countries , in some cases taxes are so onerous on certain investment areas (foreign stocks, bonds, foreign bonds etc.) that investing in those asset classes make no sense.



Therefore according to the GMP strategy it's bad to be a contrarian and good to be smack dab in the middle of the herd where you can ride for free on the markets supposedly superior opinion of prices and asset allocation.


BTW small cap growth is, historically, one of the worst performing stock screens. Small cap works well, historically, with a value screen though. That doesn't mean that those results will hold for the future though.

ThisDinosaur
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Re: Global Market Portfolio

Post by ThisDinosaur » Thu Mar 16, 2017 6:38 am

BlueNote, are you aware of any information on the past performance of the GMP? The closest I can find is past projections of the current (approximated) allocation projected backwards and rebalanced as a fixed allocation. But that's obviously flawed.

Shouldn't a non-rebalanced GMP have minimal volatility? Shouldn't it have essentially zero volatility if you include correct allocations of gold, cash, and commodities?
You can't pick stocks/bonds/real estate and expect to beat the market (on a risk adjusted basis) because the market is the sum total of all investment decisions and you're never going to be as smart, adaptable and sophisticated as the market.
I've always had trouble with this assumption. It seems to claim that every single investor is below average. But I read something by Sharpe recently where he says the Market price implicitly includes a weighted statistical insight of all predictions. I suppose that makes sense. Even more so if the investors with the most money invested are also the most well informed.
- Exchange rates are way more volatile than bond values and can also overwhelm stock and real estate values. Currency hedging comes at a cost of the effort/time of implementing it, the cost of the hedging securities and the risk that it won't work as planned.
If PPP generally holds, shouldn't exchange rate volatility cancel out as noise over multi-decade investment horizons? Especially if you hold GMP and never have to rebalance?
- Taxes vary in different countries , in some cases taxes are so onerous on certain investment areas (foreign stocks, bonds, foreign bonds etc.) that investing in those asset classes make no sense.
Can you talk more about this? Any specifics?
according to the GMP strategy it's bad to be a contrarian
Popular sources of investing advice are flooded with the idea that contrarian is good. Be greedy when others are fearful etc. Rebalancing a multi-asset portfolio is cyclical contrarianism, as I see it. When we optimize our way up to the "perfect" index portfolio, all of a sudden that whole line of thought gets abandoned? *This* is where I feel like I'm missing something important. When I see a clear picture of where every other investor in aggregate is putting their money, it seems like that's exactly where I *shouldn't* be following the herd.

@BRUTE
I'm not trying to be argumentative. I genuinely feel like thinking about this portfolio is exposing some very fundamental flaw in my understanding.

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BlueNote
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Re: Global Market Portfolio

Post by BlueNote » Thu Mar 16, 2017 9:55 pm

@ThisDinosaur

Lot's of questions there. I'm not an expert or anything so here's my opinion based on my current base of knowledge.

I want to note that I don't recommend the GMP investment strategy, nor do I use it. My portfolio is super diversified but I don't invest in foreign bonds due to the currency volatility and tax issues for me in my country. However it is interesting and may work well in pure form or as a template for some people.

Read the Meb Faber document cited by Brute earlier in this post for historical performance, the works cited in that document will lead you to yet more research material. Researching back through citations like this is a great way to learn more.

Regarding elimination of volatility

You generally can't eliminate that because all assets are priced relative one another. Even cash is relative, the value of cash one minute ago isn't the same as cash now because what it can buy is forever changing. Diversification tends to dampen it because of the un-coorelated nature of different asset classes but it's always going to be there. There may be some highly theoretical ideas about how to eliminate it, I'm not aware of any, but that's just pie in the sky.

William Sharpe is good background reading for the GMP, I think his ideas are behind a lot of it.

Will PPP hold?

Time is sort of like a form of diversification in that the longer the duration of time you use for comparisons the less volatility you'll see. For example daily stock returns are more volatile then weekly which is more volatile then monthly etc. This holds for exchange rates too. Also the more countries you're invested in the less volatility you'll expect to see. However I don't think the currency volatility is ever totally cancelled out.


Taxes.

For example withholding taxes. Many countries will withhold a certain portion of dividends and interest paid to foreigners before it ever leaves the home country. Foreigners often have no control over this and it is taken at the source. Then after the foreigner gets their cut of the distribution the home country will often tax the remaining foreign income higher then they do distributions from home country securities. So any 'free lunch' from international diversification is often wiped out (and then some) due to discriminatory taxation policy. You'd need to research the relevant tax code in your country to see how it works there, usually a google search on the topic is helpful.

Contrarianism.

In my opinion contrarianism alone isn't going to allow you to beat the market, it is a necessary component though. Also would the general public ever buy a book about an investing strategy that sometimes does well?

I find it difficult to find really obviously good investments that are better then the market index. I find it really , really hard . I do have an active portfolio (10% of my wealth) which has 2 investments right now. So far I am beating the markets but not by much and it could just be luck.

ThisDinosaur
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Re: Global Market Portfolio

Post by ThisDinosaur » Fri Mar 17, 2017 2:55 pm

Read the Meb Faber document cited by Brute
I became aware of GMP after reading this post on Meb's site:
http://mebfaber.com/2015/05/30/chapter- ... portfolio/
Figure 32b compares GMP and GAA(which is GMP plus allocations to Gold and Commodities) to stocks, bonds and T bills.
Image
Notice how GAA has a max drawdown of 26.72%.

Here is where my brain goes all logic bomb:
You hold a perfectly sampled selection of all investable assets and hedges, i.e., one that matches the actual market. When investors leave one asset class and go into another, the change in values should exactly match eachother (your total portfolio value stays the same + earnings, dividends, and interest) UNLESS they are investing in a tertiary asset that you aren't (like cash in their mattress.) If you hold the right proportion of cash, then the purchasing power of that cash goes UP, you rebalance (or not?), and you should have a Max Drawdown as low as the error between your GMP sample and the precise actual market.

Why/How is this wrong?

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BlueNote
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Re: Global Market Portfolio

Post by BlueNote » Fri Mar 17, 2017 11:16 pm


ThisDinosaur
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Re: Global Market Portfolio

Post by ThisDinosaur » Sat Mar 18, 2017 7:07 am

"The market portfolio is unobservable."
So the GMP can only ever be an incomplete, inaccurate approximation. But shouldn't this approximation be significantly less volatile than other Fixed Asset Allocations? Brute quotes Faber's book (which i haven't read yet) as saying the performance of multi asset portfolios is essentially identical.
http://mebfaber.com/2016/05/18/institut ... on-models/
http://mebfaber.com/2015/08/23/your-buy ... nt-matter/

So why should it be that GMP performs so similarly to these other fixed asset models, rebalanced annually? Jacob offers one compelling explanation. That this period studied is the MPT era.

Does rebalancing function to 1)reduce volatility by better approximating the GMP, 2)maintain a specific "risk profile", or 3)sell assets at their peak/buy at the trough in order to increase your returns above those of other investors.

I've always preferred explanation#3, but Sharpe points out that, if this is what all investors (active and passive) are trying to do, it is mathematically impossible for all of us to accomplish.
http://web.stanford.edu/~wfsharpe/aaap/wfsaaap.pdf

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BlueNote
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Re: Global Market Portfolio

Post by BlueNote » Mon Mar 20, 2017 5:54 pm

@ThisDinosaur

Re-Balancing Favours Sideways markets , Adaptive Asset allocation (from the aforementioned Sharpe paper) favours trending markets.
over an investors lifetime as the market values of the underlying securities change. The rationale being that the market is the best arbiter of value and relative riskiness so the portfolio construction should use markets as a guide to asset allocation in order to maintain a desired level of risk.

Here is a quote from his paper:

"Figure 2 shows that over this period our fund varied from being significantly riskier than the U.S. bond+stock market to being considerably less risky. At the end of March 2000, the proportion of market value in stocks was 75.06%, leading to the lowest relative risk for the fund in the entire period. At the end of February 2009, the situation was just the opposite. The proportion of market value in stocks fell to its nadir of 43.18%; making the fund, at 60%, much riskier than the overall U.S. bond plus stock market."

So it appears that adaptive asset allocation would have suggested a heavier stock weighting right before the dotcom bust and a lighter weighting on stocks right before the current mega-bull market we've been experiencing. I'll just leave things at that, I think both re-balancing and adaptive asset allocation can work. Adaptive asset allocation is lazier and probably easier to implement. Re-Balancing is contrarian, buy into weakness and sell into strength, maintain the fixed allocation approach. Either approach is basic enough that they're both still probably within the spectrum of investing strategies that people consider passive, adaptive asset allocation is arguably more passive.

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