TAA Investing


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.

GMP May 2015

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.


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8 thoughts on “ A better benchmark – the global market portfolio

  1. That’s very helpful Paul. As a UK based investor I struggle to find the comparable etf’s for many of the other portfolios but this should solve that problem. Many thanks for this website.

  2. Paul,

    My own personal experience has been that if you buy individual stocks that are non US based that the country that they are based in will tax you on dividends even if your funds are in a tax deferred account like a 401k. The exception is Canada if you fill out a bunch of forms. So even if Total is sending you 4%+ in dividend money the French government dings you for approx. 25%. Or BP with 5%+ dividends the British government dings you approx. 15%.

    Secondly, if you own US stocks many times you are actually buying a “World” stock. Exon, Apple, MicroSoft are doing business all over the World and owning a share reflects how their business is Worldwide. My point being that if you have US stocks only many will actually be World based.

    1. Bob, in this post I’m talking about passive index investing. Owning individual stocks is an active investment approach.

      With regards to foreign dividends using international ETFs, in a taxable account you can reclaim the foreign dividends taxes. In a tax deferred account you can’t but the impact is practically irrelevant. See this Bogleheads article.

      To your second point, this is a very common misconception. Relying on US large cap multinationals for foreign diversification does not work very well. Whatever impact foreign earnings has to US multi nationals it is not enough to provide sufficient diversification. See here .


  3. Paul,

    Thanks for a great website. One question; I’m trying to understand the rankings in your GMP spreadsheet. How are they figured? Thanks

    1. Hey Frank, that’s just a hold over from my GTAA13 spreadsheet. The rankings are based on the average return column. They are not applicable to this portfolio really. I’m going to get rid of them.


  4. Paul,

    Total and BP are paying almost 6% today on their ADRs. I own both. If you take out 15% for BP and 25% for Total that is not small change. Just my humble opinion. It evens out to about the same dividend that Verizon, Chevron, and Exxon at 4% but no tax till withdrawn.

    I don’t know who LARRY SWEDROE is at CBS – He is correct but still does not change my thoughts that you should primarily look at the company involved and not add in additional variables of trying to predict / guess what is going to happen in markets outside the USA. Plus you have to add in currency fluctuations. I also add in a “Country” factor. This is mainly adding in reliability. I have a lot of experience dealing with business Worldwide and can tell you some places you can trust with your money and some are less worthy.

    But, bottom line, putting some money outside the US market is a good idea when those markets are likely to do better than here.

    I never funds of stocks or bonds. What fun would that be?

    1. If you’re owning individual stocks, yes, it is an important consideration. The post is about owning the whole market portfolio, the only true passive investing approach.

      Larry Swedroe is one of the best investment commentators out there. It is worth learning who he is and reading what he writes.


  5. Paul, Great site. I went to the returns page but didn’t find “returns.” Do you have that listed anywhere? Jerry

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