Pragmatic Capitalism

Capital for Living a More Practical Life

Don’t taxes and variations in taxation make the GFAP impossible.

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In many domains, the impact of taxation makes the locally applicable GFAP different from the non-tax weighted GFAP. Asset allocation critically depends on an individuals tax situation, so that individual optimization to achieve a global GFAP return minus taxes and fees varies widely both around the world and among individuals/families in all countries. A good financial advisor or wealth manager is optimizing net returns for a client, adjusted for their tax situation and their perceived risk tolerance. In many cases the tax situation dominates the analysis. So isn’t the real alpha issue for a wealth manager optimizing net returns for a client by deviating from the GFAP dependent on taxes?

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Posted by John Daschbach
Posted on 08/24/2016 11:02 PM
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Yeah, as I wrote in my original critique of the GFAP, it’s not an ideal portfolio for many reasons. The main one being that it’s been the wrong way to be allocated for much of its history. In other words, I found that the GFAP was overweight stocks in the late 70s and 80s when, on a risk adjusted basis, you really wanted to be overweight bonds for these periods. We see this regularly with this portfolio as well. You’re overweight stocks in the late 90’s and underweight stocks after the financial crisis. That makes no sense!

So yes, the GFAP is “the market” portfolio, but I would certainly not argue it’s the ideal portfolio.

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Cullen Roche Posted by Cullen Roche
Answered on 08/25/2016 12:39 AM
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