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.
Join thousands of other readers and subscribe to our blog.
Please remember that past performance is not an indicator of future results. Please read our full disclosures. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.
Definitions of common statistics used in our analysis are available here (towards the bottom)
- Alibaba, at $350bn, is China’s 2nd largest company by market cap and 10% of it’s investable market!
- Fama, Eugene F., and Miller Merton H., 1972, The theory of finance, New York: Holt, Rinehart & Winston., pages 20-21
- “Father of Modern Finance”, Chicago Booth Magazine, Fall 2013
- Fama, Eugene F., and Miller Merton H., 1972, The theory of finance, New York: Holt, Rinehart & Winston., page 22
- the scale to which depends on your source
About the Author
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