Apologies for the light posting of late. I’ve been visiting with family down in south Florida the last 10 days or so enjoying some great catching up time, my niece’s high school graduation, and way to much good Cuban food. Priorities you know! In today’s quick post I want to touch on what ‘should’ be the benchmark portfolio for investors. There are a lot of strong opinions out there about on this topic but the basic gist for us here in the US is that our standard 60/40 portfolio benchmark is too US centric and does not accurate reflect the breakdown of the global market asset classes. Here I’ll present a better benchmark, a global market portfolio.
If you are an efficient market person then your top priority is to own the ‘market portfolio’. Sounds simple in theory. But that begs the question, what is the ‘market’? For most US investors, the ‘market portfolio’ has pretty much meant a 60% US stock and 40% US bond portfolio. (Note: This market portfolio varies by country. For example, European investors’ average stock allocation is between 30-40% ). That may have been the appropriate benchmark at one point but in today’s global world that is not even close to true. Today’s market portfolio should encompass a more global approach especially considering the shrinking of US market capitalization as a share of the world. Seems obvious, no? Despite the seeming logic behind building and holding a global portfolio the most popular portfolio benchmark for US investors remains the 60/40 portfolio. By the way, I’m avoiding the whole active vs passive debate here. Many argue that anything other than a global market portfolio is an active bet on certain markets over others. See here for a good post on the active vs passive debate. My opinion, based on the historical data , is that a global market portfolio is a better benchmark to use for any investor and that a global market portfolio has better compounded returns and risk adjusted performance over the long term. Let’s take a look at a global market portfolio and the ETFs that can be used to build such a portfolio.
The global market portfolio weights asset classes by their global market share. The best two posts on weighting the global asset classes are here and here . I’m going to use the GestaltU example for this post. Here are the global major asset classes and their weights in a global portfolio.
The Global Market Portfolio (GMP) is 45% stocks and 55% bonds. Quite different from 60/40. But there is even a greater difference. US stocks comprise about 50% of ACWI. That means US stocks are only 19% of the global portfolio. That’s a huge change from the standard US investor market portfolio. US bonds represent 16.5% of the GMP. Using the ETFs listed in the chart above the GMP can be owned for about 0.3% per year. It’s possible to build the GMP for less using lower cost Vanguard, Fidelity, or Schwab funds but this example will do and will make it easier for me to track going forward. I’ve put together a spreadsheet , similar to the GTAA 13 spreadsheet, that can be used to track the performance of the GMP. This is also the lowest turnover portfolio an investor and own as it does not requite annual rebalancing.
In summary, the global market portfolio (GMP) represents the global market for investable asset classes broken down by their share of the global market. It represents a better ‘market portfolio’. I’ll be adding this portfolio to the portfolio I track on the blog and it will represent my default benchmark for all portfolios.