This is a really excellent piece of work on bringing these concepts to a broader audience. I’m quite interested in long-term investment modelling so I’d like to offer my thoughts. Of course, the below isn’t advice, so please don’t make investment decisions purely on my comments below.
It’s great that you are thinking about how to adjust standard investing concepts based on the notion that it is the total altruistic portfolio that matters, which is formed in a decentralised way. I agree this adds to the rationale for being “overweight” the company that the investor founded, or investing in individual properties. This is not how a typical investor thinks, so there is likely scope to think further along these lines. Either to improve coordination between EA investors, or to better implement a decentralised solution by departing from standard investment concepts.
I think your idea extends to alternative investments. Common wisdom in institutional investment is that it requires greater governance capabilities to invest in the more diversifying assets, such as infrastructure, some hedge funds, unlisted (commercial or residential) property, and private equity. That is, they require greater expertise, more time spent on investment processes, necessitate more careful cashflow management due to illiquidity, and potentially other challenges. And that greater governance capabilities are rewarded—see https://link.springer.com/article/10.1057/jam.2008.1. If an EA investor cares only about the overall altruistic portfolio and is capable of making/managing such investments, then it might make sense to overweight them. Some of them might be accessible through pooled funds.
In the article you rely on the standard deviation of annual returns as a measure of risk. But long term risk isn’t well captured by that. Taking a step back, risk should ultimately be defined based on altruists’ utility function over spending at different points in time. For example, there might be “hinge” moments when altruistic spending is especially effective. Imagine there is going to be a massive opportunity in 100 years to influence the creation of AGI by altruistic spending. In that case, we don’t really care if the annual standard deviation of returns is high. We care only about the probability distribution of the 100 year return.
There is a limit to the ability of leverage to magnify returns. This is partly because of the asymmetry of returns. For example, if you start with $100, then experience −50% return then +50% return, you end up with $75. Assuming you readjust your borrowing amount regularly alongside changes in the asset value, this effect is magnified by leverage and detracts from the overall return. See https://holygrailtradingstrategies.com/images/Leveraged-ETFs.pdf for more.
Leverage has a strong role in the Capital Asset Pricing Model theory you’re using. The theory does however assume away various challenges to do with leverage, like the one above. In general, it is uncommon for institutional investors (pension funds, university endowments, charitable foundations, etc) to directly borrow to invest. However, they may outsource it to a money manager, e.g. a hedge fund, who can access a decent borrowing rate on their behalf and who has the expertise to manage it. I’m not saying that leverage should never be used by EA investors. Rather, I would be quite careful before deciding to use it.
When actuaries model (commercial) real estate, it’s normally assumed that both its risk and expected return are somewhere in between those of shares and bonds. Arguably, real estate has characteristics of each, as it is an asset used for productive enterprise, and since leases typically provide regular fixed rental payments. Nevertheless, I would look to property indices’ historical data for guidance.
Certainty equivalence may not be the right concept for measuring the value of moving all EA investments to a global market portfolio. I would instead compare the sharpe ratios. If you want to put an expected dollar figure on it, one way would be to calculate the increase in expected return you could achieve while holding risk constant. This avoids needing to make an assumption about investor risk preferences, which the certainty equivalent concept relies on.
I haven’t read all your footnotes so perhaps some of the above is mentioned there. Nevertheless, I hope my comments are helpful and I am glad people in EA is actively thinking about this. Happy to chat more if you are interested.
This is a really excellent piece of work on bringing these concepts to a broader audience. I’m quite interested in long-term investment modelling so I’d like to offer my thoughts. Of course, the below isn’t advice, so please don’t make investment decisions purely on my comments below.
It’s great that you are thinking about how to adjust standard investing concepts based on the notion that it is the total altruistic portfolio that matters, which is formed in a decentralised way. I agree this adds to the rationale for being “overweight” the company that the investor founded, or investing in individual properties. This is not how a typical investor thinks, so there is likely scope to think further along these lines. Either to improve coordination between EA investors, or to better implement a decentralised solution by departing from standard investment concepts.
I think your idea extends to alternative investments. Common wisdom in institutional investment is that it requires greater governance capabilities to invest in the more diversifying assets, such as infrastructure, some hedge funds, unlisted (commercial or residential) property, and private equity. That is, they require greater expertise, more time spent on investment processes, necessitate more careful cashflow management due to illiquidity, and potentially other challenges. And that greater governance capabilities are rewarded—see https://link.springer.com/article/10.1057/jam.2008.1. If an EA investor cares only about the overall altruistic portfolio and is capable of making/managing such investments, then it might make sense to overweight them. Some of them might be accessible through pooled funds.
In the article you rely on the standard deviation of annual returns as a measure of risk. But long term risk isn’t well captured by that. Taking a step back, risk should ultimately be defined based on altruists’ utility function over spending at different points in time. For example, there might be “hinge” moments when altruistic spending is especially effective. Imagine there is going to be a massive opportunity in 100 years to influence the creation of AGI by altruistic spending. In that case, we don’t really care if the annual standard deviation of returns is high. We care only about the probability distribution of the 100 year return.
There is a limit to the ability of leverage to magnify returns. This is partly because of the asymmetry of returns. For example, if you start with $100, then experience −50% return then +50% return, you end up with $75. Assuming you readjust your borrowing amount regularly alongside changes in the asset value, this effect is magnified by leverage and detracts from the overall return. See https://holygrailtradingstrategies.com/images/Leveraged-ETFs.pdf for more.
Leverage has a strong role in the Capital Asset Pricing Model theory you’re using. The theory does however assume away various challenges to do with leverage, like the one above. In general, it is uncommon for institutional investors (pension funds, university endowments, charitable foundations, etc) to directly borrow to invest. However, they may outsource it to a money manager, e.g. a hedge fund, who can access a decent borrowing rate on their behalf and who has the expertise to manage it. I’m not saying that leverage should never be used by EA investors. Rather, I would be quite careful before deciding to use it.
When actuaries model (commercial) real estate, it’s normally assumed that both its risk and expected return are somewhere in between those of shares and bonds. Arguably, real estate has characteristics of each, as it is an asset used for productive enterprise, and since leases typically provide regular fixed rental payments. Nevertheless, I would look to property indices’ historical data for guidance.
Certainty equivalence may not be the right concept for measuring the value of moving all EA investments to a global market portfolio. I would instead compare the sharpe ratios. If you want to put an expected dollar figure on it, one way would be to calculate the increase in expected return you could achieve while holding risk constant. This avoids needing to make an assumption about investor risk preferences, which the certainty equivalent concept relies on.
I haven’t read all your footnotes so perhaps some of the above is mentioned there. Nevertheless, I hope my comments are helpful and I am glad people in EA is actively thinking about this. Happy to chat more if you are interested.