fast rule?

Passive Investing

Concluding Thoughts

There are theories and then there are practical realities. Theoretically I should have 1 basis point allocated to Afghani Light-Rail-Bonds, but practically accessing that paper probably isn’t worth it for my portfolio (or my life expectancy!)

In this short piece, I highlight the concept of the global market portfolio, identify some of the recommendations stemming from this theoretical construct, and discuss some arguments for why we may not need to consider this theory the gospel. The general takeaway is that we often invest in markets in a theoretically sub-optimal way, but in a way that is adequate from a practical standpoint. We also focused on equity allocations. Fixed income can get trickier. The 17.4 trillion dollars of bonds represented by the Bloomberg Barclays Aggregate Index is less than half of the investable $39.1 trillion universe of US domestic bonds (as reported by Guggenheim). Is the AGG index good enough? Or do we need to dig deep into the 39.1 trillion dollars to maintain our tie with the global market portfolio’s theory? Possibly, but perhaps not. We can punt that discussion to another article.

In the end, investors should focus on what they can measure and control with more certainty, namely fees and taxes. Luckily, that task doesn’t take a PhD (or a high priced investment advisor). Most ETF’s are already structured to minimize capital gains and have relatively low fees. Tax loss harvesting strategies and maximizing the tax deferral nature of 401Ks and IRAs are also straightforward. So forget about optimizing your portfolio to match a global market portfolio construct and go back to sleep. You probably won’t miss much during your slumber.


Note: This site provides no information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.


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Definitions of common statistics used in our analysis are available here (towards the bottom)


References

  1. source
  2. Alibaba, at $350bn, is China’s 2nd largest company by market cap and 10% of it’s investable market!
  3. Fama, Eugene F., and Miller Merton H., 1972, The theory of finance, New York: Holt, Rinehart & Winston., pages 20-21
  4. “Father of Modern Finance”, Chicago Booth Magazine, Fall 2013
  5. Fama, Eugene F., and Miller Merton H., 1972, The theory of finance, New York: Holt, Rinehart & Winston., page 22
  6. the scale to which depends on your source

About the Author

Jon Seed

Jonathan Seed began his career at Franklin Resources where he was an Assistant Portfolio Manager for their then quantitative asset arm, Franklin Asset Management Systems. There, he helped build value biased equity portfolios. After graduating with honors from the University of Chicago Booth School of Business, he began a 20 year career on Wall Street focused on fixed income, with an emphasis on structured products. He started in fixed income research before switching to institutional sales, leaving Credit Suisse as Managing Director in 2009 for RBS Securities and leaving the industry altogether in 2014, after which he started Seed Wealth Management, Inc., a Registered Investment Advisor incorporated in the state of Illinois. Visit www.seedwealthmgmt.com for a full summary of our approach.

Article by Jonathan Seed, Alpha Architect

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