galeno

BGI's All World ETF Could Fundamentally Change the Way People Invest

Most index fund or index ETF investors look at MARKET CAPITALIZATION of world stock markets---not at PPP-adjusted GDP.

That's why the USA gets approximately 40% of the world stock market allocation instead of 25%.

Total Stock Market ETFs vs. Slice 'n Dice

Emergency funds = Sufficient

Debt: None

Age: 50

Situation: Married couple with children. Spouse aged 50. Four children aged 21, 18, 13, and 11. Early retirement planned for July 2009. No future pensions or company sponsored healthcare. Minimal Social Security benefits in 12 to 20 years. 100% of early retirement living expenses must come from the retirement portfolio.

Desired Asset allocation: From 60/10/30 sliced and diced to 70/0/30 lumped (stocks/hard assets/bonds)

Intl allocation: Ranging from 50% of stocks in sliced and diced portfolios to 0% in the lumped portfolio.

Portfolio size = Sufficient

Planned Initial Annual Withdrawal Rate: Minimum 3.00% to maximum 3.60% assets per year.


I. THE PORTFOLIOS


A. Totally Sliced and Diced Portfolio

US Stocks 30%
6.25% VTI (US Large Cap Core)
6.25% VTV (US Large Cap Value)
6.25% VB (US Small Cap Core)
6.25% VBR (US Small Cap Value)
5.00% VNQ (US REIT)

Non-US Stocks 30%
10% VEU (Non-US Large Cap Core)
5% GWX (Non-US Small Cap Growth)
5% DLS (Non-US Small Cap Value)
5% VWO (Emerging Market Large Cap Core)
5% WPS (Non-US REIT)

Hard Assets 10%
5% GLD (Gold)
5% DBC (Commodities)

Fixed Income 30%
15% USD 1yr CD
15% BWX (Non-US Treasury Bond ETF)

B. Cheaply Sliced and Diced Portfolio

US Stocks 35%
8.75% VTI (US Large Cap Core)
8.75% VTV (US Large Cap Value)
8.75% VB (US Small Cap Core)
8.75% VBR (US Small Cap Value)

Non-US Stocks 35%
35% VEU (Non-US Large Cap Core)


Fixed Income 30%
30% USD 1yr CD

C. Lumped Portfolio

US Stocks 70%
70% VTI (US Large Cap Core)

Fixed Income 30%
30% USD 1yr CD


II. PORTFOLIO STATISTICS

A. Federal Tax Rate (Ratio) = X% of total portfolio per year

Totally Sliced = 0.50%
Cheaply Sliced = 0.33%
Lumped = 0.44%

B. P/E of stock portfolio TTM (with REITs)

Totally Sliced = 17.11
Cheaply Sliced = N/A
Lumped = N/A


C. P/E of stock portfolio TTM (minus REITs)

Totally Sliced = 14.03
Cheaply Sliced = 15.04
Lumped = 15.97


D. Portfolio Net Yield = X% [Gross Yield - Total Expense Ratio (Bernstein-Galeno)]

Totally Sliced = 1.11%
Cheaply Sliced = 1.85%
Lumped = 2.37%

E. Stated Expense Ratios = X% of total portfolio

Totally Sliced = 0.76%
Cheaply Sliced = 0.34%
Lumped = 0.08%

F. Total Expense Ratios (Bernstein-Galeno) = X% of total portfolio (Expense Ratios + Commissions + Bid-Ask Spreads + Impact Costs + Tax Ratio + Rebalancing Costs)

Totally Sliced = 1.25%
Cheaply Sliced = 0.67%
Lumped = 0.53%


G. Rebalancing Costs = X% of total portfolio per year
Totally Sliced = Undetermined. Assume zero at this time.
Cheaply Sliced = Undetermined. Assume zero at this time.
Lumped = Undetermined. Assume zero at this time.


H. Frictionless (cost-free) Real (inflation adjusted) Annual Portfolio Growth Rate Assumptions going forward: 2% for fixed income and hard assets. 4% for US and Foreign large caps. 6% for US and Foreign small caps and REITs.

Totally Sliced = 3.95%
Cheaply Sliced = 3.75%
Lumped = 3.40%

I. NET Real (inflation adjusted) Annual Portfolio Growth Rate Assumptions going forward: [Frictionless REAL Annual Growth Rate] – [TER-Bernstein-Galeno]

Totally Sliced = 3.97 – 1.25 = 2.70%
Cheaply Sliced = 3.75 – 0.67 = 3.08%
Lumped = 3.40 – 0.53 = 2.87%



III. SCENARIOS:

A. Over 50 years, $10,000 in a Totally Sliced and Diced Portfolio will grow to a frictionless (cost free) inflation-adjusted $69,378. Net of TER-Bernstein-Galeno costs, this will grow to $37,990. The investor will capture 54.6% of the frictionless terminal value while financial croupiers (“Wall Street” and the IRS) will rake in 45.4%.


B. Over 50 years, $10,000 in a Cheaply Sliced and Diced Portfolio will grow to a frictionless (cost free) inflation-adjusted $63,009. Net of TER-Bernstein-Galeno costs, this will grow to $45,754. The investor will capture 72.3% of the frictionless terminal value while financial croupiers (“Wall Street” and the IRS) will rake in 27.7%.


C. Over 50 years, $10,000 in a Lumped Portfolio will grow to a frictionless (cost free) inflation-adjusted $53,214. Net of TER-Bernstein-Galeno costs, this will grow to $41,156. The investor will capture 77.3% of the frictionless terminal value while financial croupiers (“Wall Street” and the IRS) will rake in 22.7%.

IV. COMMENTS:

Not taking into account rebalancing costs or anything that I’ve either missed or miscalculated, it appears that the Cheaply Sliced and Diced Portfolio is the way to go here.

Conclusion here is that slicing and dicing a portfolio is good up to a point. The costs of slicing and dicing for an indexed portfolio may be very important.

Even indexed portfolios are expensive when you look at total costs which include Expense Ratios, Commissions, Bid-Ask Spreads, Impact Costs, Taxes, and Rebalancing Costs (uncalculated at this time).

Between “Wall Street” and the IRS, an indexed portfolio investor using the above portfolios will still sacrifice 45.4%, 27.7%, or 22.7% respectively of the 50 year terminal values to these financial croupiers who put up 0% of the funds and take 0% of the financial risk.

V. QUESTIONS:

Is there anything I’ve missed or omitted before “dissing” the asset-class junkie’s preference (i.e. my own addiction) for extremely sliced and diced portfolios?

Comments and or questions are welcome.