Market sizes of PP components

[LazyInvestor]

What are the market sizes of the PP components and how come they don't play a role in the respective PP component weights?

Here is what I can find:

The U.S. market capitalization is $19.8 trillion, or 52% of world market cap (http://www.marketwatch.com/story/heres- ... 2015-08-12)

"For decades, the $12.5 trillion market for U.S. government debt was renowned for its “depth,” Wall Street’s way of talking about a market’s ability to handle large trades without big moves in prices. But lately, that resiliency has practically vanished -- and that’s a big worry." (http://www.bloomberg.com/news/articles/ ... rates-rise)

Q: What's the size of bills vs LT bonds?

"According to the World Gold Council (WGC), at the end of 2014, the total above ground stock of physical gold stood at around 180,000 tons. That’s about 5.7 billion ounces. At today’s dollar price (a little under $1100 per ounce), that comes to about $6.3 trillion." (http://schiffgold.com/commentaries/just ... ld-market/)

[dualstow]

I hate that I have no answers to offer, but this is a great topic to explore.

[rickb]

What are the market sizes of the PP components and how come they don't play a role in the respective PP component weights?

Because market cap has nothing to do with the PP component weights.

The weights are selected so that no matter what macroeconomic condition prevails (prosperity, inflation, deflation, recession/depression) you won't end up losing much and also have a good chance of at least one of the assets doing quite well. 

Perhaps a better question is why aren't the weights related to the probability of these macroeconomic conditions occurring?  And, the answer is the same.  If you weighted the components based on occurrence probability, you'd end up with more stock and less gold and bonds.  The effect would be when the stock market crashes (which it does annoyingly often) you'd end up losing much more money.  You might be better off in the long term, but most humans really hate losing money (even in the short term) which makes this a more difficult path to follow.

Another question is why aren't the weights related to the volatility of the components?  I think the actual answer here is that they are, but only approximately and 4x25 is recommended because it's simple (and close enough).

[barrett]

I was hoping that someone like rickb would provide input on this one. I had posted a similar question a while back but it didn't generate much interest.

I think the respective size of the markets would be more relevant to PP investors if there were really a good chance that a lot of investors would move into gold when moving out of bonds or stocks. In general they don't, at least not proportionately. But I think the relatively small size of the gold market is probably significant when demand really does go up, meaning that it doesn't take as much money coming in to move a smaller market higher... or something like that.

[dualstow]

Of course the market size should not drive the proportion the way it does for Bogleheads' stock allocations of largecap, midcap, smallcap.
Common sense says that someone as bright as Browne wouldn't have missed that. And, it would be a recurring question on this forum.

I'm just interested in the answers purely for curiosity's sake.

[MachineGhost]

What are the market sizes of the PP components and how come they don't play a role in the respective PP component weights?

That's an interesting question.  Leaving aside the many flaws of market-cap weighting, it is curious why it hasn't been proposed in the annals of portfolio ideas.  But then again, no one ever seems to look at things in terms of economic environments rather than diworsification.  So here goes:

Stocks 51.30%
Treasuries 32.38%
Gold 16.32%

Technically, only LT Treasuries should be included.  Maybe someone can find that information?

I admit I'm surprised at how large the gold market is.

[MachineGhost]

Perhaps a better question is why aren't the weights related to the probability of these macroeconomic conditions occurring?  And, the answer is the same.  If you weighted the components based on occurrence probability, you'd end up with more stock and less gold and bonds.  The effect would be when the stock market crashes (which it does annoyingly often) you'd end up losing much more money.  You might be better off in the long term, but most humans really hate losing money (even in the short term) which makes this a more difficult path to follow.

Your fear is unfounded.  See the Clive Climate Probability portfolio in this thread: http://gyroscopicinvesting.com/forum/pe ... ortfolios/

I think the actual answer here is that they are, but only approximately and 4x25 is recommended because it's simple (and close enough).

That's a matter of debate.  Since volatility is not linear, small differences between assets can have a disproportionate portfolio impact.  Gold is typically overweight in risk exposure in the orthodox PP, but ironically it has been the 2nd best performing investment historically.  If that was not the case, people would hate the PP and gold even more than they do this year!

[LazyInvestor]

I know that it's not used in the design of PP, but my question is to come up with justification of why it should not be used. I'm having hard time justifying it. As part of his justification of PP design, HB has pointed out that while one or more components can tank over 50%, the winning component usually goes many times up (not happening in last few years). So if X amount of money goes into these different markets, it would cause the biggest rise in the smallest markets, right? This means we should expect big upside maybe in gold but not that much in stocks due to the money inflows. Not sure what the effect of this should be on PP. Maybe equal weighting of stocks and gold should be there as (at least theoretically) stocks should grow due to both productivity increase and money inflow, while gold pretty much just because of money inflow (new supply is negligible).

[MachineGhost]

I know that it's not used in the design of PP, but my question is to come up with justification of why it should not be used. I'm having hard time justifying it. As part of his justification of PP design, HB has pointed out that while one or more components can tank over 50%, the winning component usually goes many times up (not happening in last few years). So if X amount of money goes into these different markets, it would cause the biggest rise in the smallest markets, right? This means we should expect big upside maybe in gold but not that much in stocks due to the money inflows. Not sure what the effect of this should be on PP. Maybe equal weighting of stocks and gold should be there as (at least theoretically) stocks should grow due to both productivity increase and money inflow, while gold pretty much just because of money inflow (new supply is negligible).

I'm confused trying to untangle your multiple thoughts, but it is almost midnight here.  I think you are trying to engage in market timing without admitting it.  Which is enough to confuse anyone.

I suggest you learn about the negative flaws that market cap weighting brings to asset classes, nevermind to the portfolio as a whole if constructued that way as well, then reconsider if you still think there is no justfication.