My version is likewise a portfolio of exchange-traded funds. James Picerno, AKA the Capital Spectator, has been channeling this portfolio for some time, and his vital blog regularly reports on the performance of the global market index. The faux indexers should be unmasked for the closet active managers they are. As Meb Faber succinctly puts it, "any deviations and you're an active investor." What if you own a fund that tracks the MSCI or FTSE world index of stocks - essentially, every stock in the world? Is that diversified enough? Far from it: you still invest in only a fraction of the global market.ĭilettantes and debutantes may dabble by indexing this or that little asset class, but the Global Market Portfolio separates these indexing poseurs from the manly men who go all the way.Maybe you own a total US stock market index fund (including the small cap stocks beyond the S&P 500)? M y friend, you are just a tyro making a home country biased bet.Do you perhaps own an S&P 500 Index fund and call yourself a Boglehead? Bah! That is a mere bagatelle.outcome, we only control the former.Įrgo, the Global Market Portfolio is the apotheosis of passive index investing. Realized risks and returns will be different. The carrot that the Global Market Portfolio dangles is the highest expected return for the least expected risk on a forward-looking basis. The problem is, we can't tell which ones they will be in advance. If your girlfriend were this low maintenance, you would have married her already.ĭoes this mean we are guaranteed to get the highest or the safest returns? Dream on, daddy-o! Over any finite period of time, looking backwards, there always will have been better portfolios to have owned. Want more? Its building blocks are low-expense, tax-efficient index funds. Plus, this zeppelin doesn't need rebalancing because any changes in weightings among its asset classes simply reflect the underlying changes in the global market itself. As Wittgenstein quipped in the Tractatus, it is like a scale applied to reality. If that doesn't turn your mood ring blue, consider this: the Global Market Portfolio doesn't need benchmarking because it is itself the uber-benchmark of all other portfolios. Either way, we remain hard-riding cowboys on the efficient frontier. If we are high rollers, we borrow money to leverage our bet. If we are conservative, we water it down with cash to suit our risk tolerance. Once we own the Global Market Portfolio, the only other thing we need is cash. If you could get the market portfolio itself, which you can't, that would be better still. We really should call it the "investable" market portfolio. As Richard Roll pointed out in his famous 1977 critique, the market portfolio doesn't include your human capital, your family business, your wife's jewelry, your house in East Egg, or the Renoir over your fireplace. Academics like Columbia's Andrew Ang estimate that it will outperform two-thirds of active managers if implemented cheaply using index funds.Įven this is not the good turtle soup, only the mock. In aggregate and on average, it is the portfolio we do own, but alas, individually we typically hold something less good. Other things equal, financial theory says this passive, long-only portfolio with market capitalization weights is the portfolio that we should own. A pension fund or a sovereign wealth fund, for example, might require something different. They mean an investor who does not have an atypical mandate. As of the end of 2012, the tune went something like this:Īs these researchers put it, this is "the optimal portfolio for the average investor." By "average" here, they do not mean "lowbrow," as opposed to you, the dashing "sophisticated high-net-worth" investor. The latest attempt to pin it down comes from Doeswijk, Lam and Swinkels and has crashed into the Financial Analysts Journal. As I rhapsodized in The Affluent Investor, the Global Market Portfolio ".is the river formed by the confluence of all investments, the Ganges into which every investor dips his cup." It is the portfolio actually owned by everyone in the world in total.
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