David Swensen’s Updated Model Asset Allocation

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If you don’t know the name David Swensen, he is an investment manager who is best know for managing Yale Universities huge endowment. What makes him interesting is that even though he does invest in some hedge funds and private equity, he doesn’t believe that the common investor should try to emulate this. An excerpt from a recent interview in the Yale Alumni Magazine sums it up:

That’s why the most sensible approach is to come up with specific asset allocation targets that you can implement with low-cost, passively managed index funds and rebalance regularly. You’ll end up beating the overwhelming majority of participants in the financial markets.

In his 2005 book Unconventional Success: A Fundamental Approach to Personal Investment, he proposed a model asset allocation using what he believes are the 6 “core asset classes” that an individual investor should own:

Unconventional Success Model Portfolio Breakdown

Asset Allocation For 70% Stocks/30% Bonds (with ETF examples)
30% Domestic Equity (VTI, IYY)
15% Foreign Developed Equity (EFA, VEA)
5% Emerging Markets (VWO, EEM)
20% Real Estate (VNQ, ICF)
15% U.S. Treasury Bonds (SHY, IEF)
15% Inflation-Protected Securities (TIP, IPE)

But in the Yale interview, he proposes a slight change that reduced real estate exposure in exchange for increased emerging markets holdings:

Today, Swensen says, economic conditions might call for a modest revision. He now recommends that investors have 15 percent of their assets in real estate investment trusts, and raise their investment in emerging-market stock funds to 10 percent.

This interview was printed in March/April 2009, so I’m not sure if you could call this performance chasing or not. I don’t follow his model asset allocation exactly anyway – I think the best idea is to read his excellent book and find out his reasoning for holding each asset class. The exact weightings you can hash out later. It definitely added another dimension to my investing views.

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  1. It’s ironic that developers of “lazy” portfolios make changes in light of recent events. It seems the lure of performance chasing is just too powerful, even for those that know better. A cap-weighted portfolio would adjust itself to these changing events, without needing anyone in the driver’s seat.

    Vanguard has something called the Vanguard Total World Stock Index Fund (VTWSX). It invests in the almost 3000 largest companies of the entire world (weighted by market capitalization), so your entire stock allocation could be that one fund.

    Swenson’s bond allocation is good, but restricting it to just government bonds implies something about the rest of the bond market. 50% total bond market index, and 50% would be more diversified, and have a better expected return (yes, with slightly more risk, but if your stock allocation is 15% REIT and 10% emerging markets, you are no stranger to risk).

  2. You could interpret economic condition to mean that the relative global market weight of REITs has dropped since 2005, and Emerging Markets has grown. This allocation reflects that.

    I always thought not rounding to the nearest 5% was silly anyway.

  3. MrsCasanova says

    I agree with matt about the interpretation of the economic condition. How long do you think it will be until the economy starts to recover?

  4. Leaving off Corporate Bonds has nothing to do with trying to time the market and everything to do with the fact it is an asset class stacked against investors. It tries to be safe and provide better returns, but those can be achieved by investing 50% in government bonds and 50% in equities getting you best of breed for safety and better returns. Corporate bonds by their nature don’t have their incentives aligned with investors.

  5. Living Off Dividends says

    Maury, would you please explain your comment “Corporate bonds by their nature don’t have their incentives aligned with investors”.

    I find this an interesting statement and would like to hear more about your rationale.

  6. @Living Off Dividends – I’m not Maury but I think the idea is that corporation (and shareholders) want to make their borrowing costs as low as possible, and thus make themselves seems as trustworthy as possible to keep corporate bond yields low. This incentivizes businesses to color the truth in their financials and other informational releases. This makes it at odds with investors, who want to be fairly compensated for taking on additional risk.

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