Bill Sharpe's preferred portfolio

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watchnerd
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd »

pascalwager wrote: Tue Jan 14, 2020 8:39 pm

For June 30, 2015
Right, which means it's not really correct 5 years later given the market port shifts over time.

You don't need a multicolor graph to say:

'Pick your TIPS allocation at whatever level you like. Put the rest of your funds in the market portfolio'.

Which is what he has said, verbally in YouTube interviews and all that graph is really showing given the market portfolio is fluid over time.
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager »

watchnerd wrote: Tue Jan 14, 2020 11:47 pm
pascalwager wrote: Tue Jan 14, 2020 8:39 pm

For June 30, 2015
Right, which means it's not really correct 5 years later given the market port shifts over time.

The market portfolio changes every day.

You don't need a multicolor graph to say:

'Pick your TIPS allocation at whatever level you like. Put the rest of your funds in the market portfolio'.2

It's saying versus showing.

Which is what he has said, verbally in YouTube interviews and all that graph is really showing given the market portfolio is fluid over time.
Sharpe is attributing risk in a simple way. TIPS are riskless because they don't have default or inflation risk. The market portfolio is risky because it contains stocks and corporate bonds and non-inflation protected sovereign bonds. Bernstein and Edesess and others do likewise.

The only reason I referred to the graph is because you didn't believe that Sharpe intended for the TIPS to be allocated based on percentage (of TIPS and market portfolio) and regularly rebalanced.
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd »

pascalwager wrote: Wed Jan 15, 2020 2:05 am
Sharpe is attributing risk in a simple way. TIPS are riskless because they don't have default or inflation risk. The market portfolio is risky because it contains stocks and corporate bonds and non-inflation protected sovereign bonds. Bernstein and Edesess and others do likewise.

The only reason I referred to the graph is because you didn't believe that Sharpe intended for the TIPS to be allocated based on percentage (of TIPS and market portfolio) and regularly rebalanced.
Fair enough.

But I still find it all pretty underwhelming, given his track record, basically:

1. Hold market weight in stocks.

A fair number of BHers seem to do it independent of Sharpe.

2. Hold market weight in bonds, including international.

Jury is out on if this is really optimal, but Vanguard seems to be moving in that direction.

3. Combination of #1 + #2 = ~60/40 port

That's comforting, but given all the other research that takes the ubiquitous 60/40 as the baseline for 'balanced', it's just icing on the cake for that AA.

4. Have a riskless LMP portfolio in TIPS

Also not conceptually new. Whether it counted as 'bucket investing' our not depends on if one is allowed to balance out of riskless into risky.


It's all pretty common stuff that has been discussed by others, elsewhere.

I don't mean to sound mean, but I expected something more from a guy that has a Nobel prize.
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Re: Bill Sharpe's preferred portfolio

Post by DB2 »

watchnerd wrote: Wed Jan 15, 2020 2:30 am
I don't mean to sound mean, but I expected something more from a guy that has a Nobel prize.
What else do you expect? There's not much more to it all when it comes down to it (unless one buys into the smart alpha, momentum, etc.) It's like someone saying, "Jack Bogle was brilliant. He started Vanguard and created the index in a time where it was inconceivable given the industry mindset. You mean he only recommends two or at the most three stinking index funds to hold forever while adjusting an AA? That's it?! I expected more from such a smart guy, sheesh."
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Re: Bill Sharpe's preferred portfolio

Post by watchnerd »

DB2 wrote: Wed Jan 15, 2020 8:42 am

What else do you expect? There's not much more to it all when it comes down to it (unless one buys into the smart alpha, momentum, etc.) It's like someone saying, "Jack Bogle was brilliant. He started Vanguard and created the index in a time where it was inconceivable given the industry mindset. You mean he only recommends two or at the most three stinking index funds to hold forever while adjusting an AA? That's it?! I expected more from such a smart guy, sheesh."
Say: "Nothing more needs to be said"

Reading all the RISMAT stuff is just a re-hash of known ideas.

There is value in collecting it all, but a task more suitable to a writer of popular books for the layman.
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Re: Bill Sharpe's preferred portfolio

Post by palanzo »

watchnerd wrote: Wed Jan 15, 2020 2:30 am
pascalwager wrote: Wed Jan 15, 2020 2:05 am
Sharpe is attributing risk in a simple way. TIPS are riskless because they don't have default or inflation risk. The market portfolio is risky because it contains stocks and corporate bonds and non-inflation protected sovereign bonds. Bernstein and Edesess and others do likewise.

The only reason I referred to the graph is because you didn't believe that Sharpe intended for the TIPS to be allocated based on percentage (of TIPS and market portfolio) and regularly rebalanced.
Fair enough.

But I still find it all pretty underwhelming, given his track record, basically:

1. Hold market weight in stocks.

A fair number of BHers seem to do it independent of Sharpe.

2. Hold market weight in bonds, including international.

Jury is out on if this is really optimal, but Vanguard seems to be moving in that direction.

3. Combination of #1 + #2 = ~60/40 port

That's comforting, but given all the other research that takes the ubiquitous 60/40 as the baseline for 'balanced', it's just icing on the cake for that AA.

4. Have a riskless LMP portfolio in TIPS

Also not conceptually new. Whether it counted as 'bucket investing' our not depends on if one is allowed to balance out of riskless into risky.


It's all pretty common stuff that has been discussed by others, elsewhere.

I don't mean to sound mean, but I expected something more from a guy that has a Nobel prize.
Nice summary.

Why would one need to balance out of riskless LMP into risky? With 40 bonds those will provide sufficient funds to rebalance to 60/40 during a downturn.
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Re: Bill Sharpe's preferred portfolio

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palanzo wrote: Wed Jan 15, 2020 12:20 pm

Nice summary.

Why would one need to balance out of riskless LMP into risky? With 40 bonds those will provide sufficient funds to rebalance to 60/40 during a downturn.
Because otherwise you're using a bucket approach, which has a higher SWR failure rate according to the Estrada paper.

That being said, there comes a point where if the COL:portfolio size multiple is high enough (say, 40x), it probably doesn't matter.
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Re: Bill Sharpe's preferred portfolio

Post by palanzo »

watchnerd wrote: Wed Jan 15, 2020 12:29 pm
palanzo wrote: Wed Jan 15, 2020 12:20 pm

Nice summary.

Why would one need to balance out of riskless LMP into risky? With 40 bonds those will provide sufficient funds to rebalance to 60/40 during a downturn.
Because otherwise you're using a bucket approach, which has a higher SWR failure rate according to the Estrada paper.

That being said, there comes a point where if the COL:portfolio size multiple is high enough (say, 40x), it probably doesn't matter.
My reading of the Estrada paper is that when he models the bucket approach he uses two buckets. Bucket one is bills and bucket 2 is stocks. Of course this underperforms static allocations.

What he does not do is model bucket one as cash equivalents and bucket two as 60/40 as we are discussing above. Perhaps I have misread his paper but as I mentioned in a previous post on Estrada I don't agree with his approach and assumptions.
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Re: Bill Sharpe's preferred portfolio

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palanzo wrote: Wed Jan 15, 2020 1:13 pm

My reading of the Estrada paper is that when he models the bucket approach he uses two buckets. Bucket one is bills and bucket 2 is stocks. Of course this underperforms static allocations.

What he does not do is model bucket one as cash equivalents and bucket two as 60/40 as we are discussing above. Perhaps I have misread his paper but as I mentioned in a previous post on Estrada I don't agree with his approach and assumptions.
The devils are definitely in the details.

Here's the hole I find in Sharpe's concept -- without knowing the relative size of the risky portfolio vs riskless, you don't know if the risky portfolio will generate enough returns to refresh the riskless side.

And by defining 'risky' as stocks + bonds, you're putting a drag on the risk portfolio.

Example:

1,000,000 to allocate.

1. 50% in riskless = $500k in TIPS
2. 50% in risky = $500k in 60/40

Weighted, that gives me:

TIPS = 50% of port
Risky Bonds = 20% of port
Stocks = 30% of port

Total: 30% stocks / 70% bonds

You can call it whatever you want, do mental accounting to call one side 'riskless' and the other side 'risky', but that's what you have.

Whether a 30/70 portfolio has good enough returns to support your retirement needs will vary immensely, but...

1. Calling it what it truly is (30/70) is going to make planning a lot easier when it comes using retirement planning calculators

2. Figuring out withdrawal patterns is a lot easier if you do it in aggregate for the whole port, per the usual methods. And if you're going to use something like variable withdrawals on the whole port, why bother with the mental risky vs riskless accounting?

3. True risk management is a lot more accurate if you view it aggregate. Using the above allocations:

Risk Decomposition:

Riskless:
31.32%: TIPS
Risky:
6.49%: Global Bonds (USD Hedged)
27.04%: US Stock Market
35.16%: Global ex-US Stock Market

https://www.portfoliovisualizer.com/bac ... tion4_1=15


That reality is obscured by the 'risky' vs 'riskless' mental accounting.


4. If the argument in favor of holding the global market weights in everything is that it avoids having to choose how to tilt, the question of what % of total assets should be allocated to TIPS removes that. Doing so *does* require an active decision, a tilt, and thus undermines the whole premise to begin with.

In the above example, a 30/70 port is *not* the global market weight port, no matter how much you might take comfort in pretending that part of it is.
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Re: Bill Sharpe's preferred portfolio

Post by palanzo »

watchnerd wrote: Wed Jan 15, 2020 1:46 pm
palanzo wrote: Wed Jan 15, 2020 1:13 pm

My reading of the Estrada paper is that when he models the bucket approach he uses two buckets. Bucket one is bills and bucket 2 is stocks. Of course this underperforms static allocations.

What he does not do is model bucket one as cash equivalents and bucket two as 60/40 as we are discussing above. Perhaps I have misread his paper but as I mentioned in a previous post on Estrada I don't agree with his approach and assumptions.
The devils are definitely in the details.

Here's the hole I find in Sharpe's concept -- without knowing the relative size of the risky portfolio vs riskless, you don't know if the risky portfolio will generate enough returns to refresh the riskless side.

And by defining 'risky' as stocks + bonds, you're putting a drag on the risk portfolio.

Example:

1,000,000 to allocate.

1. 50% in riskless = $500k in TIPS
2. 50% in risky = $500k in 60/40

Weighted, that gives me:

TIPS = 50% of port
Risky Bonds = 20% of port
Stocks = 30% of port

Total: 30% stocks / 70% bonds

You can call it whatever you want, do mental accounting to call one side 'riskless' and the other side 'risky', but that's what you have.

Whether a 30/70 portfolio has good enough returns to support your retirement needs will vary immensely, but...

1. Calling it what it truly is (30/70) is going to make planning a lot easier when it comes using retirement planning calculators

2. Figuring out withdrawal patterns is a lot easier if you do it in aggregate for the whole port, per the usual methods. And if you're going to use something like variable withdrawals on the whole port, why bother with the mental risky vs riskless accounting?

3. True risk management is a lot more accurate if you view it aggregate. Using the above allocations:

Risk Decomposition:

Riskless:
31.32%: TIPS
Risky:
6.49%: Global Bonds (USD Hedged)
27.04%: US Stock Market
35.16%: Global ex-US Stock Market

https://www.portfoliovisualizer.com/bac ... tion4_1=15


That reality is obscured by the 'risky' vs 'riskless' mental accounting.


4. If the argument in favor of holding the global market weights in everything is that it avoids having to choose how to tilt, the question of what % of total assets should be allocated to TIPS removes that. Doing so *does* require an active decision, a tilt, and thus undermines the whole premise to begin with.

In the above example, a 30/70 port is *not* the global market weight port, no matter how much you might take comfort in pretending that part of it is.
I agree with all your points. The TIPS represent about 12 years of withdrawals at 4%. Personally I would not keep so much in the LMP although others might. If one models an overall 60/40 allocation with a TIPS LMP then the risk profile is not as bad as you have shown.

Estrada was talking about Bucket one representing 1-5 years of withdrawals. As you say, the devil is definitely in the details.

Personally I am staying with a market weight 60/40 portfolio.
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Re: Bill Sharpe's preferred portfolio

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palanzo wrote: Wed Jan 15, 2020 2:34 pm

I agree with all your points. The TIPS represent about 12 years of withdrawals at 4%. Personally I would not keep so much in the LMP although others might. If one models an overall 60/40 allocation with a TIPS LMP then the risk profile is not as bad as you have shown.

Estrada was talking about Bucket one representing 1-5 years of withdrawals. As you say, the devil is definitely in the details.

Personally I am staying with a market weight 60/40 portfolio.

I'm 70/30 now. My equities are market weight. I'll probably move to 60/40 in about 2 years.

Personally, I'm just going to count my LMP as part of the 40% bonds.

We already do this, as we have a short TIPS / cash allocation as part of our bond allocation.
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Re: Bill Sharpe's preferred portfolio

Post by palanzo »

watchnerd wrote: Wed Jan 15, 2020 2:43 pm
palanzo wrote: Wed Jan 15, 2020 2:34 pm

I agree with all your points. The TIPS represent about 12 years of withdrawals at 4%. Personally I would not keep so much in the LMP although others might. If one models an overall 60/40 allocation with a TIPS LMP then the risk profile is not as bad as you have shown.

Estrada was talking about Bucket one representing 1-5 years of withdrawals. As you say, the devil is definitely in the details.

Personally I am staying with a market weight 60/40 portfolio.

I'm 70/30 now. My equities are market weight. I'll probably move to 60/40 in about 2 years.

Personally, I'm just going to count my LMP as part of the 40% bonds.

We already do this, as we have a short TIPS / cash allocation as part of our bond allocation.
Likewise. I count my LMP as part of the 40% bonds. Do you hold the short TIPS in taxable?
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager »

I don't find Sharpe referring to the TIPS portfolio as an LMP. It just seems to be an overall risk reduction component that includes inflation risk reduction. Also, Sharpe is only targeting "many retirees", not younger investors.

And anyone is free to put all of their retiree savings into the high-performing T. Rowe Price New Horizons Fund (small/mid growth) which one former BH member actually did back in 2012 (he didn't like cash or bonds because of inflation risk and low-yields).
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Re: Bill Sharpe's preferred portfolio

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pascalwager wrote: Wed Jan 15, 2020 3:06 pm I don't find Sharpe referring to the TIPS portfolio as an LMP. It just seems to be an overall risk reduction component that includes inflation risk reduction.
I think it's completely open to interpretation what the TIPS part is.

He basically punts on the question and said 'TBD between you and your advisor'.

If the advisor likes LMP, it will probably be LMP oriented. If not, it would be smaller, just a 'buffer'.
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Re: Bill Sharpe's preferred portfolio

Post by CyberBob »

31 January 2020 FTSE numbers (in millions of USD):

31,312,957 - U.S. stocks - FTSE Global All-Cap index, U.S. breakdown
24,996,509 - ex U.S. stocks - FTSE Global All-Cap index minus U.S.
23,147,130 - U.S. bonds - FTSE US Broad Investment-Grade index
19,961,800 - ex U.S. bonds - FTSE World Broad Investment-Grade index minus U.S.

So that equates to allocation percentages of:

31.50% US stocks (VTSAX,FSKAX,VTI,ITOT,SCHB,SPTM)
25.14% ex US stocks (VTIAX,FTIHX,VXUS,IXUS,ACWX,CWI)
23.28% US bonds (VBTLX,FXNAX,BND,AGG,SCHZ,SPAB)
20.08% ex US bonds (VTABX,FBIIX,BNDX,IAGG)

Or, alternatively:

56.64% world stocks (VT,VTWAX)
43.36% world bonds (BNDW)
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Re: Bill Sharpe's preferred portfolio

Post by CyberBob »

29 February 2020 FTSE numbers (in millions of USD):

28,695,054 - U.S. stocks - FTSE Global All-Cap index, U.S. breakdown
22,955,022 - ex U.S. stocks - FTSE Global All-Cap index minus U.S.
23,470,130 - U.S. bonds - FTSE US Broad Investment-Grade index
20,046,610 - ex U.S. bonds - FTSE World Broad Investment-Grade index minus U.S.

So that equates to allocation percentages of:

30.15% US stocks (VTSAX,FSKAX,VTI,ITOT,SCHB,SPTM)
24.12% ex US stocks (VTIAX,FTIHX,VXUS,IXUS,ACWX,CWI)
24.66% US bonds (VBTLX,FXNAX,BND,AGG,SCHZ,SPAB)
21.06% ex US bonds (VTABX,FBIIX,BNDX,IAGG)

Or:

54.27% world stocks (VT,VTWAX)
45.73% world bonds (BNDW)
Last edited by CyberBob on Thu Apr 30, 2020 1:21 pm, edited 1 time in total.
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Re: Bill Sharpe's preferred portfolio

Post by asset_chaos »

CyberBob wrote: Fri Mar 27, 2020 2:08 pm The allocations over time seem pretty consistent. You can see just a little dip in the December 2018 and February 2020 stock percentages. It will be interesting to see what the March Corona Virus-affected numbers will look like.
I set up a M* portfolio of the global markets portfolio to use as a benchmark. It currently says around 53:47 stocks:bonds.
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Re: Bill Sharpe's preferred portfolio

Post by CyberBob »

Two interesting links:

William Sharpe blog, where he talks about the World Bond-Stock portfolio and the corresponding Vanguard funds used to build it.
https://retirementincomeanalysis.blogspot.com/?m=1

FTSE Russell calculator for Sharpe's Adaptive Asset Allocation.
https://research.ftserussell.com/Analyt ... Home/Index
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Re: Bill Sharpe's preferred portfolio

Post by CyberBob »

31 March 2020 FTSE numbers (in millions of USD):

24,645,470 - U.S. stocks - FTSE Global All-Cap index, U.S. breakdown
19,522,099 - ex U.S. stocks - FTSE Global All-Cap index minus U.S.
23,296,690 - U.S. bonds - FTSE US Broad Investment-Grade index
19,344,680 - ex U.S. bonds - FTSE World Broad Investment-Grade index minus U.S.

So that equates to allocation percentages of:

28.39% US stocks (VTSAX,FSKAX,VTI,ITOT,SCHB,SPTM)
22.49% ex US stocks (VTIAX,FTIHX,VXUS,IXUS,ACWX,CWI)
26.84% US bonds (VBTLX,FXNAX,BND,AGG,SCHZ,SPAB)
22.28% ex US bonds (VTABX,FBIIX,BNDX,IAGG)

Or:

50.88% world stocks (VT,VTWAX)
49.12% world bonds (BNDW)
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Re: Bill Sharpe's preferred portfolio

Post by CFM300 »

I just wanted to thank those who continue to update this thread. Very interesting and useful. :beer
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Re: Bill Sharpe's preferred portfolio

Post by CyberBob »

31 May 2020 FTSE numbers (in millions of USD):

29,290,091 - U.S. stocks - FTSE Global All-Cap index, U.S. breakdown
21,821,490 - ex U.S. stocks - FTSE Global All-Cap index minus U.S.
23,080,940 - U.S. bonds - FTSE US Broad Investment-Grade index
20,431,910 - ex U.S. bonds - FTSE World Broad Investment-Grade index minus U.S.

So that equates to allocation percentages of:

30.95% US stocks (VTSAX,FSKAX,VTI,ITOT,SCHB,SPTM)
23.06% ex US stocks (VTIAX,FTIHX,VXUS,IXUS,ACWX,CWI)
24.39% US bonds (VBTLX,FXNAX,BND,AGG,SCHZ,SPAB)
21.59% ex US bonds (VTABX,FBIIX,BNDX,IAGG)

Or:

54.02% world stocks (VT,VTWAX)
45.98% world bonds (BNDW)
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager »

Here's a link to an article about RISMAT by Joe Tomlinson (financial planner). He refers to it as a financial economics textbook and lists some asset allocation practices which might appear suspect to someone inclined toward total market investing. The linked article also provides a couple of interesting Sharpe interview links.

https://www.advisorperspectives.com/art ... t-planning

And thanks to CyberBob for continuing the WBS portfolio AA updates.
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Re: Bill Sharpe's preferred portfolio

Post by Maestro G »

CyberBob wrote: Sat Jun 13, 2020 9:28 am 31 May 2020 FTSE numbers (in millions of USD):

29,290,091 - U.S. stocks - FTSE Global All-Cap index, U.S. breakdown
21,821,490 - ex U.S. stocks - FTSE Global All-Cap index minus U.S.
23,080,940 - U.S. bonds - FTSE US Broad Investment-Grade index
20,431,910 - ex U.S. bonds - FTSE World Broad Investment-Grade index minus U.S.

So that equates to allocation percentages of:

30.95% US stocks (VTSAX,FSKAX,VTI,ITOT,SCHB,SPTM)
23.06% ex US stocks (VTIAX,FTIHX,VXUS,IXUS,ACWX,CWI)
24.39% US bonds (VBTLX,FXNAX,BND,AGG,SCHZ,SPAB)
21.59% ex US bonds (VTABX,FBIIX,BNDX,IAGG)

Or:

54.02% world stocks (VT,VTWAX)
45.98% world bonds (BNDW)
Hi CyberBob,

Perhaps I am confused, but it appears to me from the FTSE AA Calculator (bottom text) https://research.ftserussell.com/Analyt ... Calculator, that for the end of May the MCAP percentages were exactly the opposite:

54% World Bond
46% World Stock

What am I missing here?

Thanks!

Maestro G
Everything should be made as simple as possible, but no simpler. Most daily market noise is "a tale told by an idiot, full of sound and fury, signifying nothing.”
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Re: Bill Sharpe's preferred portfolio

Post by asset_chaos »

I believe cyberbob uses the FTSE World BIG bond index and the FTSE US BIG bond index monthly fact sheets for the market value of US and ex-US bonds. The links go to the most recent month's sheet, which are both dated 31 May 2020. Similarly for stocks is the FTSE Global All Cap Stock index fact sheet, which is dated 29 May 2020. The numbers cyberbob quotes are the correct numbers for end of May according to those sheets. And a quick math check on percentages confirms those are right for the dollar figures too. But I do see what you mean: that FTSE calculator page certainly does say the global stock:bond ratio at end of May is 46:54.

I guess the question is what's that FTSE calculator page really showing to be so markedly different from other FTSE data? As the BIG in the bond indices stands for Broad Investment Grade, could the calculator be including the non-investment grade bond market, and is it large enough to make that much difference? All the homepage for the calculator says is
Adaptive Asset Allocation Policy weights are calculated by FTSE Analytics based on data sourced from FTSE Russell and Thomson Reuters Datastream for bonds. Bond data generally reflects Datastream All Lives Total Market government bond data combined with market-leading corporate bond data.
which may imply they're using different bond data from their own BIG bond index data. From a brief description of the Thomson Reuters Datastream database, for bonds they say one can
Access a wide coverage of government and corporate bonds, warrants, convertibles, including global international and domestic issues in an increasing range of major currencies. In total, over 500,000 active bonds and convertibles and 1.4 million active warrants across 72 markets are available.
As the FTSE World BIG fact sheet says it covers around 13,000 investment grade only bond issues, and since I don't think the World BIG index includes warrents and convertibles, it may be the FTSE calculator uses a much more expansive definition of bonds to include convertibles, warrents, and non-investment grade bonds. Perhaps that is where the difference is.
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Re: Bill Sharpe's preferred portfolio

Post by Maestro G »

asset_chaos wrote: Fri Jun 19, 2020 12:03 am I believe cyberbob uses the FTSE World BIG bond index and the FTSE US BIG bond index monthly fact sheets for the market value of US and ex-US bonds. The links go to the most recent month's sheet, which are both dated 31 May 2020. Similarly for stocks is the FTSE Global All Cap Stock index fact sheet, which is dated 29 May 2020. The numbers cyberbob quotes are the correct numbers for end of May according to those sheets. And a quick math check on percentages confirms those are right for the dollar figures too. But I do see what you mean: that FTSE calculator page certainly does say the global stock:bond ratio at end of May is 46:54.

I guess the question is what's that FTSE calculator page really showing to be so markedly different from other FTSE data? As the BIG in the bond indices stands for Broad Investment Grade, could the calculator be including the non-investment grade bond market, and is it large enough to make that much difference? All the homepage for the calculator says is
Adaptive Asset Allocation Policy weights are calculated by FTSE Analytics based on data sourced from FTSE Russell and Thomson Reuters Datastream for bonds. Bond data generally reflects Datastream All Lives Total Market government bond data combined with market-leading corporate bond data.
which may imply they're using different bond data from their own BIG bond index data. From a brief description of the Thomson Reuters Datastream database, for bonds they say one can
Access a wide coverage of government and corporate bonds, warrants, convertibles, including global international and domestic issues in an increasing range of major currencies. In total, over 500,000 active bonds and convertibles and 1.4 million active warrants across 72 markets are available.
As the FTSE World BIG fact sheet says it covers around 13,000 investment grade only bond issues, and since I don't think the World BIG index includes warrents and convertibles, it may be the FTSE calculator uses a much more expansive definition of bonds to include convertibles, warrents, and non-investment grade bonds. Perhaps that is where the difference is.
Perhaps, but it’s curious to me that the percentages are exactly reversed for the asset classes :?: Could be just a coincidence, but odd.

Additionally, it is those exact percentages and this calculator that William Sharp references in his blog.

Thanks for your response Asset Chaos.

Maestro G
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CyberBob
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Re: Bill Sharpe's preferred portfolio

Post by CyberBob »

Maestro G wrote: Thu Jun 18, 2020 2:49 am
CyberBob wrote: Sat Jun 13, 2020 9:28 am 31 May 2020 FTSE numbers (in millions of USD):

29,290,091 - U.S. stocks - FTSE Global All-Cap index, U.S. breakdown
21,821,490 - ex U.S. stocks - FTSE Global All-Cap index minus U.S.
23,080,940 - U.S. bonds - FTSE US Broad Investment-Grade index
20,431,910 - ex U.S. bonds - FTSE World Broad Investment-Grade index minus U.S.

So that equates to allocation percentages of:

30.95% US stocks (VTSAX,FSKAX,VTI,ITOT,SCHB,SPTM)
23.06% ex US stocks (VTIAX,FTIHX,VXUS,IXUS,ACWX,CWI)
24.39% US bonds (VBTLX,FXNAX,BND,AGG,SCHZ,SPAB)
21.59% ex US bonds (VTABX,FBIIX,BNDX,IAGG)

Or:

54.02% world stocks (VT,VTWAX)
45.98% world bonds (BNDW)
Hi CyberBob,

Perhaps I am confused, but it appears to me from the FTSE AA Calculator (bottom text) https://research.ftserussell.com/Analyt ... Calculator, that for the end of May the MCAP percentages were exactly the opposite:

54% World Bond
46% World Stock

What am I missing here?

Thanks!

Maestro G
I think asset_chaos' post is correct, and that the most likely cause of the disparity is different indexing methodology.

It seems from Sharpe's original video interview that the four indexes he originally mentioned four years ago aren't necessarily perfect, but that they were simply the best freely-available information at the time. He even mentions that some aspects of the bond indexes are uncertain and that it's not obvious whether they are even hedged or not.

It looks like Sharpe is advocating the FTSE AAAP calculator numbers now as more exacting. In this blog post it looks like he finalizes his methodology, simplifying the funds needed down to two; Total World Stock (VT) and Total World Bond (BNDW), getting the most accurate available world bond/stock breakdown using the FTSE AAAP numbers, and even showing a very handy and simple spreadsheet example of how to adjust for any delay between the AAAP numbers and current valuations.

So it looks like I may no longer have to post numbers, as anyone wanting to follow Sharpe's World Bond/Stock can find all the needed information in this blog post.
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Re: Bill Sharpe's preferred portfolio

Post by Maestro G »

CyberBob wrote: Sat Jun 20, 2020 9:47 am
Maestro G wrote: Thu Jun 18, 2020 2:49 am
CyberBob wrote: Sat Jun 13, 2020 9:28 am 31 May 2020 FTSE numbers (in millions of USD):

29,290,091 - U.S. stocks - FTSE Global All-Cap index, U.S. breakdown
21,821,490 - ex U.S. stocks - FTSE Global All-Cap index minus U.S.
23,080,940 - U.S. bonds - FTSE US Broad Investment-Grade index
20,431,910 - ex U.S. bonds - FTSE World Broad Investment-Grade index minus U.S.

So that equates to allocation percentages of:

30.95% US stocks (VTSAX,FSKAX,VTI,ITOT,SCHB,SPTM)
23.06% ex US stocks (VTIAX,FTIHX,VXUS,IXUS,ACWX,CWI)
24.39% US bonds (VBTLX,FXNAX,BND,AGG,SCHZ,SPAB)
21.59% ex US bonds (VTABX,FBIIX,BNDX,IAGG)

Or:

54.02% world stocks (VT,VTWAX)
45.98% world bonds (BNDW)
Hi CyberBob,

Perhaps I am confused, but it appears to me from the FTSE AA Calculator (bottom text) https://research.ftserussell.com/Analyt ... Calculator, that for the end of May the MCAP percentages were exactly the opposite:

54% World Bond
46% World Stock

What am I missing here?

Thanks!

Maestro G
I think asset_chaos' post is correct, and that the most likely cause of the disparity is different indexing methodology.

It seems from Sharpe's original video interview that the four indexes he originally mentioned four years ago aren't necessarily perfect, but that they were simply the best freely-available information at the time. He even mentions that some aspects of the bond indexes are uncertain and that it's not obvious whether they are even hedged or not.

It looks like Sharpe is advocating the FTSE AAAP calculator numbers now as more exacting. In this blog post it looks like he finalizes his methodology, simplifying the funds needed down to two; Total World Stock (VT) and Total World Bond (BNDW), getting the most accurate available world bond/stock breakdown using the FTSE AAAP numbers, and even showing a very handy and simple spreadsheet example of how to adjust for any delay between the AAAP numbers and current valuations.

So it looks like I may no longer have to post numbers, as anyone wanting to follow Sharpe's World Bond/Stock can find all the needed information in this blog post.
Hi Cyber Bob,

Yes, exactly, that’s the post I was referring to and thanks again for confirming. It is interesting to me that there was that wide a swing or divergence (8%) in a fairly limited amount of time, the recent crash and bounce notwithstanding. In any case, thanks again for providing the numbers and calculations to date. It does seem now that those will be much more easily referenced going forward.

BTW, I have always loved your avatar! I assume that cute cat is yours?

Best,

Maestro G
Everything should be made as simple as possible, but no simpler. Most daily market noise is "a tale told by an idiot, full of sound and fury, signifying nothing.”
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Re: Bill Sharpe's preferred portfolio

Post by CyberBob »

Maestro G wrote: Sat Jun 20, 2020 11:12 am BTW, I have always loved your avatar! I assume that cute cat is yours?

Best,

Maestro G
Her name is Gracie. She’s gray (hence the name) and white with a perfect milk mustache. She was born in a barn on a farm in 2007 and rescued/catnapped at four weeks old by a friend of my mother when the mean farmer said he had enough barn cats and threatened to drown her in a bucket. She’s been my constant companion ever since. She’s also a great dog, as unlike most cats she always comes running when I call her name. That close-up photo is how I see her most days as she likes to sit between me and my computer keyboard and help me type. :D
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Re: Bill Sharpe's preferred portfolio

Post by Maestro G »

CyberBob wrote: Sat Jun 20, 2020 12:25 pm
Maestro G wrote: Sat Jun 20, 2020 11:12 am BTW, I have always loved your avatar! I assume that cute cat is yours?

Best,

Maestro G
Her name is Gracie. She’s gray (hence the name) and white with a perfect milk mustache. She was born in a barn on a farm in 2007 and rescued/catnapped at four weeks old by a friend of my mother when the mean farmer said he had enough barn cats and threatened to drown her in a bucket. She’s been my constant companion ever since. She’s also a great dog, as unlike most cats she always comes running when I call her name. That close-up photo is how I see her most days as she likes to sit between me and my computer keyboard and help me type. :D
A wonderful companion and a nice end to the story: how someone could kill or even think about killing an innocent animal like that is beyond me. Also, another argument against the myth that most cats are indifferent and standoffish to their “owners.” When a cat behaves that way, it usually says a lot more about the owner than the cat.

Hope you and Gracie stay well! :beer

Maestro G
Everything should be made as simple as possible, but no simpler. Most daily market noise is "a tale told by an idiot, full of sound and fury, signifying nothing.”
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Re: Bill Sharpe's preferred portfolio

Post by Taylor Larimore »

CyberBob wrote: Sat Jun 20, 2020 12:25 pm
Maestro G wrote: Sat Jun 20, 2020 11:12 am BTW, I have always loved your avatar! I assume that cute cat is yours?

Best,

Maestro G
Her name is Gracie. She’s gray (hence the name) and white with a perfect milk mustache. She was born in a barn on a farm in 2007 and rescued/catnapped at four weeks old by a friend of my mother when the mean farmer said he had enough barn cats and threatened to drown her in a bucket. She’s been my constant companion ever since. She’s also a great dog, as unlike most cats she always comes running when I call her name. That close-up photo is how I see her most days as she likes to sit between me and my computer keyboard and help me type. :D
CyberBob:

Lovely story!

Thank you and best wishes.
Taylor
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Re: Bill Sharpe's preferred portfolio

Post by pascalwager »

CyberBob wrote: Sat Jun 20, 2020 12:25 pm
Maestro G wrote: Sat Jun 20, 2020 11:12 am BTW, I have always loved your avatar! I assume that cute cat is yours?

Best,

Maestro G
Her name is Gracie. She’s gray (hence the name) and white with a perfect milk mustache. She was born in a barn on a farm in 2007 and rescued/catnapped at four weeks old by a friend of my mother when the mean farmer said he had enough barn cats and threatened to drown her in a bucket. She’s been my constant companion ever since. She’s also a great dog, as unlike most cats she always comes running when I call her name. That close-up photo is how I see her most days as she likes to sit between me and my computer keyboard and help me type. :D
Wonderful story. I've always been "curious as a cat" about the gentle and pleasing avatar. My own cat, Pennypacker, likes to perch behind my head when I'm seated on the swivel chair at the computer (and reading Bill Sharpe's blog). She was also rescued as a kitten--from the underfloor insulation in a crawlspace under a house.

I notice that the AAAP calculator consistently provides a higher bond/stock ratio than produced by Sharpe's earlier methodology.
VT 60% / VFSUX 20% / TIPS 20%
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

I question Sharpe's latest suggestion to use the FTSE AAAP weights rather than the original method of using the market caps of the indexes that the funds actually track.

Using market-cap of X but then buying Y means that
  • we're assuming that X and Y have similar fundamentals.  In this case, we're substituting investment grade bonds for non-investment grade bonds.  Seems questionable.
  • we introduce tracking error, lose the self-balancing property, and increase the need to rebalance.
I plan to stick with using the index market caps method, and hope that the indexes will improve their coverage over time (rather than trying to access the missing coverage via potentially invalid substitutes).

P.S., Of course, I'm assuming here that FTSE's bond indexes mirror Bloomberg Barclay's corresponding indexes more closely than the AAAP data. This seems to be the case base on asset_chaos's post.
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 djm2001 »

I made the following using Google Sheets to track the current values of Sharpe's World Bond-Stock Fund proxies:
The backing spreadsheet [edit: fixed link] projects the factsheet marketcaps forward to current time using current price and dividend history. This requires occasional manual update when new factsheets are released, and when dividends occur. I plan to keep this up-to-date since I plan to follow this portfolio myself.

The backing sheet also tracks some bond assets that are not covered by VBTLX -- namely, TIPS and munis. (The 2-Fund and 4-Fund allocations linked above ignore those.)

Note that, for VTSAX, I use the CRSP US Total Market Index (and project it forward) since that is what VTSAX tracks. The CRSP index covers 3.4K+ companies, while the FTSE US All Cap Index covers only 1.8K companies. I found that it gives a slightly higher market cap than using FTSE US All Cap Index, as expected.
Last edited by djm2001 on Sun Jul 05, 2020 7:44 am, edited 2 times in total.
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 spdoublebass »

djm2001 wrote: Fri Jun 26, 2020 11:13 pm I made the following using Google Sheets to track the current values of Sharpe's World Bond-Stock Fund proxies:
The backing spreadsheet projects the factsheet marketcaps forward to current time using current price and dividend history. This requires occasional manual update when new factsheets are released, and when dividends occur. I plan to keep this up-to-date since I plan to follow this portfolio myself.

The backing sheet also tracks some bond assets that are not covered by VBTLX -- namely, TIPS and munis. (The 2-Fund and 4-Fund allocations linked above ignore those.)

Note that, for VTSAX, I use the CRSP US Total Market Index (and project it forward) since that is what VTSAX tracks. The CRSP index covers 3.4K+ companies, while the FTSE US All Cap Index covers only 1.8K companies. I found that it gives a slightly higher market cap than using FTSE US All Cap Index, as expected.

What about EM bonds? Do you just take what is inside of BNDX? Or do you look at the different Market Values inside of the yield book indices?
I'm trying to think, but nothing happens
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

TL;DR: Yes, I just take what's in BND + BNDX for EM bonds and high-yield corporate bonds.

Long version:

To start with, BND and BNDX's indexes lack some coverage for:
  • high-yield corporate bonds ("junk bonds"), indexed by S&P US High-Yield Corporate Bond Index; market cap of $1.54T as of May 29.
  • emerging market sovereign bonds.  These are split by issuing currency into:
    • USD-issued EM sovereign bonds, indexed by FTSE's EMUSDGBI; market cap of $0.7T as of Mar 31.
    • local-currency EM sovereign bonds, indexed by FTSE's EMGBI - EMUSDGBI.; market cap of $2T as of Mar 31.
[edit: To put the above market caps in perspective, note that the four-fund proxy's total index market cap is $96T currently; and is $98T if you also include TIPS and muni bonds.]

I originally found indexes and funds to track the above, but eventually dropped them after finding significant overlap with BND / BNDX. I apply a "no overlap" criterion to the set of funds used to "cover" the market.  I'd rather leave the gaps unfilled than try to fill them with potentially invalid substitutes (i.e., funds with different fundamentals) and/or introduce significant double counting of assets.

According to Vanguard's "Emerging Market Bonds -- Beyond the headlines" whitepaper, the overlaps as of 2012 were as follows:
  • 22% of USD-issued EM bonds were already in BND.  This intersection accounted for 2% of BND.
  • 28% of local-currency EM bonds were already in BNDX.  This intersection accounted for 6% of BNDX.
The landscape has probably changed since 2012, but the point remains.  The reason for the overlap comes down to BND/BNDX broad bond indexes' criteria for a bond to be considered "investment grade", and the fact that some EM bonds meet that bar.

It should be pointed out that EM sovereign bond indices have their own criteria that eliminate smaller bonds from the tail (e.g., minimum market size, minimum issue size).  At some point, one has to give up on the tail.

I have not tried to figure out the overlap between BND and high-yield corporate bonds, but I assume some overlap exists from high-yield corporate bonds that meet the AGG's bar for "investment grade". [edit: I am probably wrong about this. Barclays' US Agg and High-Yield bond indexes are separated by bond ratings, so probably don't overlap.]

On that note, I wish there was a way to easily find the overlap between two given bond ETFs.  I know of this tool, but it doesn't work for bond funds.
Last edited by djm2001 on Thu Apr 29, 2021 9:57 am, edited 1 time in total.
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Re: Bill Sharpe's preferred portfolio

Post by calcada »

What do you think about replacing VT with VTI for higher expected returns if a person has a long time horizon?

Should someone with a long time horizon under the age 35 hold the global market portfolio?
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

For both your questions (VT vs VTI, and GMP at age 35), think about what reason or advantage or information you might possess to bet against the collective intelligence of millions of investors, many of whom have resources and information (e.g., armies of analysts, data, algorithms, and compute power) that you and I cannot hope to compete with. Is it better to go with this collective decision? Or is it better to bet against the collective decision? And if it were better to bet against the collective decision, wouldn't the large and highly sophisticated investors do the same, thus changing/correcting the collective decision to remove your free lunch?

Here's a video explaining better than I could: https://www.youtube.com/watch?v=gM4KEJQ_Z5U

The basic point is that the bulk of the investable money is in the hands of investors who have access to all the same choices that you have (US stocks, foreign stocks, US bonds, foreign bonds). And they collectively settled on the GMP ("global market portfolio") allocation and pricing. Is it reasonable to think that we can win by betting against them?

To go a little deeper regarding the question of holding the GMP at age 35, consider how market pricing works. In a competitive public market, allocations and prices are determined by equilibrium between buyers and sellers. At equilibrium, all assets have the same marginal benefit -- i.e., for the market portfolio, an additional dollar (or cent, even) spent toward (or withdrawn from) each asset in the portfolio has the same benefit.
As an example, suppose that one asset, say US stock, was a much better bet than another, say foreign bonds. Then all these highly competitive investors would flock to US stock, increasing demand, and driving the price up until US stock price was so expensive that buying $1 more of US stock has the same cost/return benefit as buying $1 of foreign bonds.

In other words, since the GMP arises from equilibrium pricing between buyers and sellers in a competative and (at least somewhat) efficient market, it should serve as the "right" allocation for both buying and selling purposes. Consequently, one should hold the GMP regardless of where we are in the accumulation stage (earning) and withdrawal stage (retirement). Note that this requires one to take a "good enough" attitude, be comfortable with achieving global market returns, and not get too worked up about trying to beat the global market.

But certainly one could do better some of the time by taking on more risk. If you do end up choosing to take on more risk to speed up your accumulation of wealth, your best bet is to tilt towards more stocks (i.e., VT). But note that increasing your stock allocation has diminishing risk adjusted returns -- that is, you take on more and more risk for less and less reward. And again, remember that you are betting against the world of investors.

(I will caveat all this by stating that I am not an economist, so take the above argument for what it's worth)

edit: One additional point re: VT vs VTI... US stock (VTI) is currently expensive (usually accompanied by lower future return), while foreign stock is relatively cheap (usually accompanied by higher future return). Buy low, sell high. US stocks have had a great run over the last decade, but US vs international outperformance has been historically cyclic. See myth 1 here.

edit: For completeness sake, here are some counter-arguments to research: Is the market really efficient? What about situations where people are forced to buy and sell at suboptimal times (e.g., retirees needing to withdraw to pay for their lifestyle, annuities/pensions required to buy certain bonds by policy/regulation)? What about different taxation for different people (e.g., CA investors experience different tax treatment for California muni bonds than non-Californians). These would all translate to suboptimalities in the GMP. The question is how large is the suboptimality of all these rough edges? And is there a cheap and easy strategy to correct for them?
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
longinvest
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Re: Bill Sharpe's preferred portfolio

Post by longinvest »

djm2001 wrote: Mon Jul 20, 2020 11:30 pm The basic point is that the bulk of the investable money is in the hands of investors who have access to all the same choices that you have (US stocks, foreign stocks, US bonds, foreign bonds). And they collectively chose to allocate a certain way. Is it reasonable to think that we can win by betting against them?
Djm2001, I don't know if it's reasonable to bet against them, but I definitely know that it's sensible to accept the market's allocation and adopt it. Yet, there are good justifications for investors to keep a moderate home bias when investing into a global portfolio. Why? Simply because the same security often provides a slightly higher return to a domestic investors than to a foreign investor due to currency conversion costs and withholding taxes. There might also be somewhat bigger political risks (because foreigners can't vote to elect those who write laws).
djm2001 wrote: Mon Jul 20, 2020 11:30 pmedit: One additional point re: VT vs VTI... US stock (VTI) is currently expensive (usually accompanied by lower future return), while foreign stock is relatively cheap (usually accompanied by higher future return). Buy low, sell high. US stocks have had a great run over the last decade, but US vs international outperformance has been historically cyclic. See myth 1 here.
All of these securities (U.S. stocks, international stocks, U.S. bonds, and international bonds) are available to trade. Anyone claiming that some of these securities are cheaper than others can act on it and get rich at the expense of others. Making the knowledge known to others would kill this advantage. There's no reason to believe that whatever metric is used to claim that some stocks are expensive and others are cheap isn't already known to investors. How would you explain that investors haven't acted on this information, leading market prices to immediately adjust to better equilibrium prices? It's much more likely that someone making such a claim has something to sell: a product or services. Said differently: you've just contradicted your earlier paragraph where you questioned betting against the collective wisdom of all investors as a group who decided of the current prices of U.S. and international stocks.

My suggestion: adopt the Market Portfolio, possibly with a moderate home bias using a One-Fund Portfolio (see this post for details), and ignore the noise!
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

Those are both great points, longinvest. And your post here was a nice read.

I totally agree that GMP is suboptimal (at a personal level) once we consider personal asymmetries, such as taxation (both country level, as well as state level, e.g., muni bonds) and personal human capital (i.e., young investor who is earning vs. old investor who is spending down). Based on one's local taxation, one might tilt towards local assets. Based on one's human capital, one might tilt away from bonds (which personal human capital can replace). The tricky question is how to tilt. In fact, I use slightly different methods than straight out tilting to address my personal situation. I try to address the taxaction issue mostly using tax-efficient asset location rather than introducing home country bias (although I do tilt a little by buying muni bonds from only my state rather than buying all muni bonds). For the personal human capital, it is a question of forecasting my income. I typically do this at one-year horizon, and project what my portfolio value should look like one year from now (at current prices) based on my annual salary, and then buy the stock allocation first, and catch up the bond allocation if/when the stock allocation surpasses its one-year-out target amount. The net effect is that I'm always slightly ahead of the GMP in terms of stock allocation, which is effectively tilting but using a principled approach that is anchored to the GMP but also tailored to my personal income potential. One could increase the income-forecasting horizon to be longer than one year if one wanted to take more personal human capital risk. [edit: full disclosure: I do only a rough approximation of the stated method b/c I'm lazy.]

re: VTI vs VT/VXUS... I agree with your point that it is contradictory to make decisions based on cheap vs expensive when that is already common knowledge in the market. The reason I brought up cheap vs expensive was to make calcada aware of those facts (that the market already knows) in order to convice them to just trust in the market, and avoid replacing VT with VTI wholesale.
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 calcada »

Thank you Djm2001 for your reply and the excellent points you made.

Wouldn't you agree that because VTI is riskier than VT, in the long run, this extra risk will be rewarded with higher expected return? Haven't we seen that historically, when we aggregate all those cycles, the US TSM has beaten the GSM?

If I understand correctly, because markets are efficient VTI is more expensive than VT which means their future return in the long run will be the same and the efficient market removes any risk premium differences. But then how would we explain the outperformance of US TSM over the GSM over the last 70 years?

Am I wrong to believe that in 30 years the US TSM is guaranteed to beat the GSM?
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Re: Bill Sharpe's preferred portfolio

Post by longinvest »

djm2001 wrote: Tue Jul 21, 2020 9:55 am I totally agree that GMP is suboptimal (at a personal level) ...
I didn't write that. I merely stated that international investing has some inefficiencies which could justify a moderate home bias in a global portfolio. I'm not claiming that a portfolio with a moderate home bias is better. The Market Portfolio remains a very logical portfolio to hold. It would be possible for all investors to hold this Market Portfolio and the market would still clear. Getting the market to clear, in a situation where all investors would try to hold the Market Portfolio with a home bias would required devising a complex asymmetric home bias formula where investors of different countries would get a different amount of home bias (and it would vary with time).
djm2001 wrote: Tue Jul 21, 2020 9:55 am Based on one's human capital, one might tilt away from bonds (which personal human capital can replace).
Human capital is an abstract concept. I prefer to work with concrete stuff, like an employment contract. A bond is a contract, too, but it significantly differs from an employment contract.

An employment contract promises to pay me a specific salary for as long as I provide the required work. This contract can be ended or changed at any time. My employer can fire me. I can give my resignation. Or we can mutually agree on a new contract to replace it, hopefully with a higher salary. I can't sell my employment contract on a market; as a consequence, it has no market value. In the last few months, many people have lost their job due to the ongoing health crisis. I have really a lot of trouble reconciling the idea that their jobs were some kind of bond replacement in a portfolio of marketable securities.

A job contract isn't a bond. A pension isn't a bond (see this post). A bond is a marketable security which promises to pay specific amounts of money on specific future dates. Like a stock, it has a market price which fluctuates according to supply and demand.

The Market Portfolio is about considering the overall collection of global stock and bond markets as a single huge market, and investing according to its capitalization-weighted composition. Adding a small or moderate home bias is likely to deliver relatively similar returns and volatility. Here's a growth chart comparing the LifeStrategy Moderate Growth Fund (VSMGX, blue) with (an approximation of) the Market Portfolio (VT/BNDW, red) and a stock-only portfolio (VT, orange) since the inception of Vanguard's Total World Bond ETF (BNDW):

Source: Portfolio Visualizer
Image

As we can see, the moderate biases of the LifeStrategy Moderate Growth fund only have a small impact on returns and volatility relative to the Market Portfolio; we can barely distinguish between the blue and red lines (I had anticipated a somewhat bigger difference, but the time span is probably too short). This is what I more-or-less mean by close enough. Choosing, on the other hand, to consider one's job as a replacement for bonds in the portfolio leads to significantly different returns and volatility (the orange line); it's a clear departure from the idea of holding the Market Portfolio.

During accumulation, I think that it's good enough to simply put one's long-term investments into the Market Portfolio (or into a similar-enough all-in-one fund with a moderate home bias like LifeStrategy Moderate Growth).

The more important concern is how much to save and invest for retirement. I reject the idea of saving less with a portfolio concentrated into an asset class that many people believe will outperform other asset classes; they could be wrong and I would have to bear the unfortunate financial consequences. I don't want, either, to save and invest so much that I don't have sufficient money left to enjoy the present doing activities I like with people I love while I'm young and healthy. I prefer to aim for some kind of balance between present spending and saving for the future. Conveniently, our Wiki provides a spreadsheet (see its Accumulation sheet) which calculates a reasonable amount of money to regularly contribute to a retirement portfolio. It's adaptive. It takes into account the investor's current situation, like age, current salary, target financial independence age, portfolio size, and future pensions to make its suggestion. It is assumed that every year and every time something changes in the investor's situation, the spreadsheet will be used to calculate a new suggestion. Its calculations are discussed in this thread.

The use of the Market Portfolio (possibly with a moderate home bias) for investments adds robustness to such an adaptive accumulation plan, allowing for unanticipated dramatic changes, possibly at inconvenient times (like losing a job in the middle of a crisis, a divorce, retiring earlier than anticipated, or...).
Last edited by longinvest on Tue Jul 21, 2020 2:30 pm, edited 14 times in total.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
djm2001
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

Hi calcada,

re: VTI is riskier than VT... IMO the additional risk is simply uncompensated (or less compensated) idiosyncratic risk arising from lower diversification (in the same way that a single stock is riskier than the US TSM). What would be a reason for higher compensation of US-based risk? I could maybe see an argument for, say, emerging markets risk or value stock risk being better compensated... but I don't immediately see why US TSM risk would have higher compensation. (Btw, an illustrative example of uncompensated risk is a large bet on a fair coin flip. The variance is high, but the expected return is zero.) [edit: Here's a video where Sharpe discusses compensated vs uncompensated risk at the 31:36 mark.]

re: VTI outperforming VT over 70 years... This feels like survivorship bias. Is there not even a small possibility that the US will falter over the next 30 years? Is it not worth hedging the US bet even slightly? I would certainly bet lots of my money on the US, but would definitely not go all in.

edit: I just realized that I did not address your core question of reconciling historical market allocations/pricing with the US outperformance over the last 70 years in my original reply. The question of US outperformance over the long term is addressed by this tweet and by this picture. Secondly, regarding the market being wrong ex post (i.e., in hindsight) over a chosen historical window, that is inevitable since long-term outcomes at any given point can vary from long-term expected value, and in fact almost always do. That does not mean that the market was wrong ex ante (i.e., with the information available at the time and the uncertainty of the future ahead). Acting based on expectations is still rational, given that we did not know the actual final outcome at the time (even though we know that the eventual outcome almost always be something other than the expected value).

I am by no means saying that US TSM will not outperform GSM over the next 30 years. I'm just saying that all investors know the past return history, and are making bets about how the chips will fall in future, and some (including extremely sophisticated investment institutions) still choose to hold some foreign stock. Given that I don't know any better, I'm best off placing my bet according to the aggregate prediction. (I assume that markets are relatively efficient, that rational and sophisticated investors rise to the top and influence prices and allocations the most, and so the resulting pricing and allocations are "good enough".) [edit: grammar]
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
calcada
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Re: Bill Sharpe's preferred portfolio

Post by calcada »

djm2001 wrote: Mon Jul 20, 2020 11:30 pm But certainly one could do better some of the time by taking on more risk. If you do end up choosing to take on more risk to speed up your accumulation of wealth, your best bet is to tilt towards more stocks (i.e., VT). But note that increasing your stock allocation has diminishing risk adjusted returns -- that is, you take on more and more risk for less and less reward. And again, remember that you are betting against the world of investors.
Do you mean that eventually in the long term, taking on more risk by tilting towards more stocks than the GMP, does not guarantee higher returns than the GMP?

Am I guaranteed to beat the GMP in the long run if I tilt towards more stocks? Despite betting against the world of investors.
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Maestro G
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Re: Bill Sharpe's preferred portfolio

Post by Maestro G »

calcada wrote: Wed Aug 12, 2020 2:59 pm
djm2001 wrote: Mon Jul 20, 2020 11:30 pm But certainly one could do better some of the time by taking on more risk. If you do end up choosing to take on more risk to speed up your accumulation of wealth, your best bet is to tilt towards more stocks (i.e., VT). But note that increasing your stock allocation has diminishing risk adjusted returns -- that is, you take on more and more risk for less and less reward. And again, remember that you are betting against the world of investors.
Do you mean that eventually in the long term, taking on more risk by tilting towards more stocks than the GMP, does not guarantee higher returns than the GMP?

Am I guaranteed to beat the GMP in the long run if I tilt towards more stocks? Despite betting against the world of investors.
No, there is no “guarantee” of future market outcomes in general. If you overweight global equities relative to the GMP weightings, and global equities outperform global bonds, then yes, your portfolio will outperform the GMP as such. It will also depend of course on how you define you investment time horizon and whether or not overweighting global equities will achieve your personal financial objectives when you need them.

Maestro G
Everything should be made as simple as possible, but no simpler. Most daily market noise is "a tale told by an idiot, full of sound and fury, signifying nothing.”
djm2001
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

calcada wrote: Wed Aug 12, 2020 2:59 pm
djm2001 wrote: Mon Jul 20, 2020 11:30 pm But certainly one could do better some of the time by taking on more risk. If you do end up choosing to take on more risk to speed up your accumulation of wealth, your best bet is to tilt towards more stocks (i.e., VT). But note that increasing your stock allocation has diminishing risk adjusted returns -- that is, you take on more and more risk for less and less reward. And again, remember that you are betting against the world of investors.
Do you mean that eventually in the long term, taking on more risk by tilting towards more stocks than the GMP, does not guarantee higher returns than the GMP?

Am I guaranteed to beat the GMP in the long run if I tilt towards more stocks? Despite betting against the world of investors.
Just because a strategy has higher expected return does not mean that it is guaranteed (or even safer) over the long run.

Take the following example.  Suppose I offered you the opportunity to place a bet where you roll a die, and if it comes up 1 or 2 (i.e., probability 1/3), I give you 6x the amount you wagered; but you lose your stake otherwise.  So, in expectation, you double your money (6 * 1/3 + 0 * 2/3 = 2).  But this is clearly not a safe bet to go "all in".  I.e., you would not bet your entire life savings on it if you were retired because you'd go broke two-thirds of the time.

Now suppose that I offered you this bet every day for the next ten years.  Going all in (i.e., betting all your money each day) is now even worse.  You would end up broke with practical certainty.

So, going all in into this bet is not a good idea, even over the long run.  But... you'd definitely bet $1 on it, right?  Maybe even $100 a day?  In fact, there is a mathematical approach to selecting the right amount to wager called the Kelly criterion, where you bet a pre-determined fraction of your wealth at each round.

But there is another approach which works well under the assumption that everyone is rational... which is to simply copy what everyone else is doing in aggregate.  No fancy math knowledge needed for this.  Some people will be using the Kelly criterion, some will be copying what others are doing.  As such, everyone will be using the optimal method either directly or indirectly.

Finally, consider how the game changes if you had some guaranteed daily stipend (e.g., a salary) that replenished a large fraction of your initial money.  In this case, it might make sense to go all in for the first round (or first few rounds) of the game because you are fairly sure that even if you lose everything, your initial pot will be replenished fairly quickly, and you can go back to the Kelly criterion. But note that as your pot increases, the stipend does not replenish the whole thing very quickly, and so you'd start slowing down your "all in" betting, and start converging on Kelly criterion betting.

To summarize:
  • It is not always wise to go "all in" into a risky bet, even if that bet has a higher expected rate of return.
  • It is fine to go all in early on if you can replenish your initial pot fairly quickly (e.g., a young investor with a stable job).
  • You can just copy what others are doing (i.e., GMP) with pretty good results. This is especially useful in a complex game such as the investing where it is not feasible for you or me to compute the optimal strategy ourselves.
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
djm2001
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

Current snapshot for Sharpe's World Bond/Stock portfolio:

4-Fund:

Code: Select all

	 	 INDEX MKT CAP ($M)	 %
VTSAX/VTI	 $ 32,979,959.19M 	31.70%
VTIAX/VXUS	 $ 24,855,297.83M 	23.89%
VBTLX/BND	 $ 23,728,201.65M 	22.81%
VTABX/BNDX	 $ 22,472,081.44M 	21.60%
2-Fund (ETF):

Code: Select all

	 	 INDEX MKT CAP ($M)	 %
VT/VTWAX	 $ 57,835,257.03M 	55.59%
BNDW		 $ 46,200,283.10M 	44.41%
Source (updated in real time): https://docs.google.com/spreadsheets/d/ ... g_/pubhtml#
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aj76er
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Re: Bill Sharpe's preferred portfolio

Post by aj76er »

djm2001 wrote: Fri Sep 11, 2020 10:14 am Current snapshot for Sharpe's World Bond/Stock portfolio:

4-Fund:

Code: Select all

	 	 INDEX MKT CAP ($M)	 %
VTSAX/VTI	 $ 32,979,959.19M 	31.70%
VTIAX/VXUS	 $ 24,855,297.83M 	23.89%
VBTLX/BND	 $ 23,728,201.65M 	22.81%
VTABX/BNDX	 $ 22,472,081.44M 	21.60%
2-Fund (ETF):

Code: Select all

	 	 INDEX MKT CAP ($M)	 %
VT/VTWAX	 $ 57,835,257.03M 	55.59%
BNDW		 $ 46,200,283.10M 	44.41%
Source (updated in real time): https://docs.google.com/spreadsheets/d/ ... g_/pubhtml#
Nice spreadsheet! Thanks for sharing :sharebeer

Have you found a way to automatically pull in the index mktcap numbers? Or are you just manually entering them in every month?
"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
djm2001
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

aj76er wrote: Sun Sep 13, 2020 1:25 pm Nice spreadsheet! Thanks for sharing :sharebeer

Have you found a way to automatically pull in the index mktcap numbers? Or are you just manually entering them in every month?
I could not figure out how to automatically pull the numbers from the factsheets. So I manually enter the index factsheet numbers each month/quarter. The real-time numbers are projected forward using the prices (automatically updated) of VTI, VXUS, BND, and BNDX, as well as any new dividends (manually entered). All this happens on the FwdProj tab. The realtime market caps (bolded) are copied from there into the MktCaps tab, which are then pulled into the various portfolio tabs.

You can leverage my manual effort in your own Google sheet by importing the FwdProj tab with the following formula:

Code: Select all

=IMPORTHTML("https://docs.google.com/spreadsheets/d/e/2PACX-1vQShEGnLTHNk2_zgHWTiReXADEhmNvLR8SIaTsdGTdQJaa_F9ESrbo8bcsP0XEsVlBFtGEbjqUMO7g_/pubhtml?gid=2086641177&single=true&widget=true&headers=false", "table", 6)
This pulls in the 6th table from the specified url, which is the FwdProj tab. Or if you want to import just the final real-time market caps, change the 6 to 5 to pull in the MktCaps tab instead.

edit: removed mention of dividends as they do not affect the market cap tracking.
Last edited by djm2001 on Sat Dec 05, 2020 8:24 pm, edited 1 time in total.
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
klaus14
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Re: Bill Sharpe's preferred portfolio

Post by klaus14 »

djm2001 wrote: Sun Sep 13, 2020 6:00 pm

You can leverage my manual effort in your own Google sheet by importing the FwdProj tab with the following formula:

Code: Select all

IMPORTHTML("https://docs.google.com/spreadsheets/d/e/2PACX-1vQShEGnLTHNk2_zgHWTiReXADEhmNvLR8SIaTsdGTdQJaa_F9ESrbo8bcsP0XEsVlBFtGEbjqUMO7g_/pubhtml?gid=2086641177&single=true&widget=true&headers=false", "table", 6)
This pulls in the 6th table from the specified url, which is the FwdProj tab. Or if you want to import just the final real-time market caps, change the 6 to 5 to pull in the MktCaps tab instead.
This is really helpful. Thanks a lot!
My investment algorithm: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=351899&p=6112869#p6112869
djm2001
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Re: Bill Sharpe's preferred portfolio

Post by djm2001 »

I went through the exercise of adding gold to Sharpe's World Bond Stock (WBS) portfolio.  (This was a thought experiment... I don't currently hold any gold in my own portfolio.)

TL;DR: Publicly investable gold allocation is ~0.2% when added to Sharpe's WBS portfolio.  (See the "4-Fund + Gold" tab here.)

Hopefully this answers the "Do I need gold?" question for those who think that Sharpe's portfolio is a good idea. You probably don't need gold unless:
  1. you have already addressed larger gaps in Sharpe's WBS portfolio (e.g., high-yield corporate bonds), AND
  2. your portfolio is large enough that 0.2% of it is a non-negligible enough amount to bother about.  (I'd only start to bother about it when 0.2% of my portfolio is a meaningful fraction -- say 5% or more -- of my annual expense.)
Okay, on to the details of how to find the right market cap for gold...

To start with, I know that we get some exposure to REITs just by holding VTI / VTSAX.  I wondered if the same was true for gold.  Turns out not to be true -- i.e., VTI's holdings do not contain GLD, IAU, AAAU, etc.  I verified this by searching VTI's holdings here.  (A possible reason for VTI not covering these gold investments is that the gold ETFs are structured as "grantor trusts" which are not considered investment companies, and therefore(?) not tracked by the CRSP US Total Stock Market index.)

Having double-checked now that gold is indeed a gap in the WBS portfolio, we now move onto the problem of determining the size of the gap by finding the right market cap to use for gold...

(Aside: I should pause here to say that I wholeheartedly agree with the argument that gold is of limited industrial use and that stored gold produces nothing.  But I disagree that this completely eliminates gold's validity as an investment. If the global market ascribes value to something, then it is worth considering, however mad it might appear at first glance... it's just a question of making sure that we don't over-allocate to those bets.  As we shall see, it is rather easy to over-allocate to gold if we aren't careful about what we measure.  But if we measure the right thing, the result is reasonable -- 0.2% is a fairly conservative amount to allocate for a speculative bet.)

Simply googling for "gold market cap" gives an answer of ~$10T.  Sharpe World Bond Stock market cap is currently ~$113T (see the "4-Fund" tab here), so adding in ~$10T gold would result in a ~8% allocation to it.  But... $10T is in fact not the market cap we're after if we use Sharpe's methodology.  We're actually only interested in the publicly investable portion of all the world's gold.  It turns out that only ~2% of the $10T of the world's gold is held in publicly investable securities -- gold ETFs, mutual funds, and the like (e.g., GLD, IAU, AAAU) -- while the rest of the gold is held in jewelry, industrial use (fabrication), physical bullion / coin, and official holdings (e.g., central bank reserves) (source).  When determining the allocation for gold ETFs in one's portfolio, I believe Sharpe's methodology would count only the market cap of gold held in ETF-investable trusts which 1) is more precisely representative of what we are buying (e.g., GLD), and 2) has a stronger case for market efficiency. (Please correct me if I'm wrong on this crucial point!)

The World Gold Council releases monthly gold ETF market caps here. I had to make a (free) account to access the data, and will track it going forward in my WBS spreadsheet. (Sharpe's original "2-Fund" and "4-Fund" WBS portfolios are still preserved in the sheet; gold is added only to the "N-Fund" variant and the "4-Fund + Gold" variant.)

Btw, the nuance here about using only the publicly investable portion of gold is very reminiscent of searching for "bond market cap", and finding an answer of $100T or more (from SIFMA data), while Sharpe's methodology (i.e., using the market cap of the indexes actually being invested in) works out to less than half of that (~$47T) for bonds.  The reason is that the SIFMA market caps include things like private placement bonds that are inaccessible to the retail investor, just as the total gold market cap contains private jewelry, central bank reserves, etc.

This story is also similar to how WBS's real estate exposure is provided by (only) market-weighted public REITs, as opposed to over-weighting public REITs to try to match the market cap of private REITs and privately-owned real estate.

My main takeaway from Sharpe's original WBS portfolio as well as this extension to gold is: buy what you measure, and measure what you buy.

P.S., I wonder how to extend this methodology to crypto. I found data sources for the overall crypto market caps here, but have not yet figured out how to measure the "investable" portion -- is it the whole market cap, or are there investor-inaccessible portions blocked off by certain entities? Any suggestions on how to figure this out? (edit: Found a recent attempt at measuring "free float crypto" here. My original market cap source claims to use "circulating supply" to measure market cap, but its numbers for Bitcoin total supply was equal to the circulating supply, so I don't think any free float correction was actually done.) But note that, even with the whole market cap, Bitcoin would be no more than a 0.4% allocation of WBS + Bitcoin portfolio. So again, it's ignorable for most investors until their portfolio grows very large and they have addressed the larger gaps in the WBS portfolio, particularly in junk bonds.

P.P.S., This post was a thought exercise to see whether Sharpe's market cap methodology extends reasonably to other asset classes. It seems to do a reasonable job that aligned well with my own previously-held beliefs and preferences (e.g., I would balk at an 8% allocation to gold), but I suppose that your reaction to the results and methodology will depend on your own beliefs about things like gold and crypto. I am not invested in either gold or crypto myself. (I won't invest in crypto until I am confident that some of the practical details (e.g., tax reporting and beneficiaries/inheritence) work smoothly and conveniently.)

edit: fixed a link, grammar
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
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