- 30% US Equities
- 20% REITs
- 15% US Treasuries
- 15% TIPS
- 15% Foreign Developed Equities
- 5% Emerging Market Equities
I've never had anywhere near that much faith in REITs, the first post if mine I can find questioning Swensen's 20% allocation to REITs was a little over a year ago. I also disagree with no commodities.
As I mentioned once before Swensen clearly had something in mind with this and I would expect that the vast majority of the time it works well, I would note it did outperform the S&P 500 in the period studied but that is not the best benchmark for that portfolio. To the extent someone would be disappointed with a 32% decline in a down 39% world I think this contributes to the case for a defensive strategy and not just relying on a diversified portfolio.
There was an article in Vanity Fair (so it was very long) called Rethinking The American Dream that might make someone who is over-extended feel rather glum and validate someone who lives below his means. I don't know how many people reading this blog have been or will be directly impacted by this Great Recession (not sure who coined it but this name might stick) but life is much easier if you don't have to worry about covering a $5000 mortgage and two $700 car payments. If you had no mortgage payment and no car payments how long would $6400 last? Those numbers are probably a tad high for most folks but you get the point.
Hopefully you know this first hand but your financial life will be much easier if your expenses are low.
After a pronounced move higher for the last few days the market took a breather yesterday with financials dropping the most. This does not mean the rally is over but I think it was a good reminder that it is unlikely the problems in the financials are over. The iShares Financial ETF (IYF) rallied 43% from its March 6 close through Wednesday. When something moves that much people get excited and project forward and it becomes easy to get caught up in the excitement. If you find yourself saying "yeah, he's right" and the next thing you know your logged in and clicking you're probably reacting to emotion rather than executing on logic. If the rally continues higher we will all be confronting more of this.
21 comments:
I suppose if I was only interested in investing for a year then a strategy that did better over last year would be a good one. This is the first strategy I have seen with TIPS playing a noticeable part and while I personally like REITs I don't know about 20%. You mention that your first comment on this was about a year ago. When did this model portfolio first come about?
I've seen a trend with ETFs that is new to me (maybe not to others with more experience) and it bothers me. Their historic chart goes back year and years of success but the ETF has only been around for less then a year. Its a "what could have been" based on the index. However looking at the % holdings of the ETF vs the % of the index they don't match. Its probably a non-issue but I get the feeling its after-the-fact knowledge to fit the economic situation. I get the same feeling with Swensen's model above.
Impact of the Great Recession: I think a lot of people are directly impacted even if they don't lose their job or get a paycut. When a person sees hundreds of thousands of people a month lose their job it tends to make them look at their own financial lifestyle and the dangers of high debt and no savings. While I feel more vindicated in my more reasonable lifestyle compared with my friends I sure wish I had been wrong and that there was nothing to be cautious about.
the portfolio is from Swensen's book from 2005
The percentage matching issue of an index is not unusual.
I'm not sure when the exact portfolio was first published; I'm gonna guess a couple of years ago. I track it on my portfolio list and Paul Farrell tracked it on his lazy portfolios list.
There are 2 things to notice about this portfolio, IMO...
1. The 20% REIT, which you've already mentioned. I'm guessing he's using the fact that it has historically not corellated to equities, so it lowers the risk profile, which is high due to...
2. Half his bond portfolio is in long term treasures (note there's only 30% bonds). THis is what kept him out of the crapper in 2008.
the LT treasuries could be a problem soon.
The problem with this topic is that no one knows what an optimal portfolio is (or was) until after the fact. Not that anyone is tearing Swenson apart here, but research shows timing the market doesn't pay in the long run. Doesn't the Yale endowment have an infinite time horizon? Therefore, if the value falls but the endowment is still able to fulfill its mission, what's the fuss?
The point is maybe the portfolio is right for him. It wouldn't be right for me because I would lose too much return to taxes. And contrary to what everyone says around here, taxes do matter!
What we're all hoping for is that the global ecomony continues to expand, this bump along the road notwithstanding. That will be the only way for our wallets to get fatter over time.
Agree with living below your means.
You sound kind of preachy and smug when you say, "contributes to the case for a defensive strategy and not just relying on a diversified portfolio." I think a large portion of Yale's investments are not liquid. When all you do is trade ETFs, you can do that. Shame on you, you should know better!
Swensen's long bond holdings are a concern to me as well. Regarding the role of bonds in a portfolio invested for growth, I like Frank Armstrong's approach, keep the duration short to minimize volatility.
See http://madmoneymachine.com/portfolios/
and
http://madmoneymachine.com/professional-lazy-portfolios/
hey anon 7:21, the context of the portfolio and the B-week post is a recommended allocation for retail investors the Swensen put forth in a book from what I believe is 2005.
Feel free to read everything before you pop off.
That sort of portfolio leads to mediocrity. The dilution of the equity component is way too much
with the treasuries(bubbleishus)
and the foreign equities(no growth
products), except asia.
At market undervaluations I just cannot see anyone making a fortune
in this mix. Equities are down the
world is more bearish now than two
other times in my dumb existance: 1974, oil embargo and gas lines; and 1980 and 17% mortgages. Please
those times we were saying very similar things doom doom and more
doom.
Now I have posted here before and
have planned with big cash position
(40%) because I would not be trapped like 2002-03 "broke" at the
bottom. So you can call this stupid, or dumb luck or seat of the
pants, but think about this:How is
this any worse than eating beans and trying to pay a 16% mortgage with gas lines and perpetual worry.
I just dont think so.
Ricky
Have to agree with those who express some skepticism regarding the Yale portfolio but, honestly, I don't think Swenson ever intended to present his model as a one-size-fits-all: It was more a model and a moral -- diversify, allocate by % rather then time, keep costs down, learn how to do it yourself rather than trusting 3rd parties -- and here's a relatively easy to follow scheme to do that with.
That aside, long bonds should be okay for awhile because the Fed has committed publicly to a quantitative easing policy and the environment is still deflationary: They will be buying the long end of the curve. If inflation kicks in as hoped then interest rates will rise and long bonds will take it in the teeth as GDP begins to improve but that time is not now nor is it likely in the intermediate future. Nations who trade with us and/or own our debt don't like any of this of course and the dollar will probably lose more value internationally as a result but the chatter about replacing the dollar as primary reserve currency is nothing more than jawboning: The politics and mechanics of change on that scale present enormous challenges and the main parties trust each other even less than they trust us.
I see some promising signs but also still see too much fat tail out there with a continuing and not insignificant chance of really serious trouble ahead; e.g., continuing Paulson's attempt to restore the financial system to its previous state is fundamentally misguided IMHO. So I remain defensive in strategic accounts on the one hand and swing trade in tactical accounts on the other: Not much in between for me right now.
And, personally, I think having a 16% mortgage, very long gas lines and worry doesn't look that bad when you have a job and/or your money market account is paying 18% -- at least it beats a 5% mortgage, short gas lines and despair when you have no job and your money market account is paying 1% -- but that's pretty much the difference between inflationary and deflationary times in America FWIW (those times can be much more extreme in other countries, particularly in the third world, of course). JMO
It's been awhile, but I think Swenson's portfolio was a "so you can sleep at night" allocation. Certainly no one in 2005 foresaw the Great Recession (although some folks are taking credit for it) and the correlation of diversified assets. I read more recently that Swenson cut the REIT allocation to 15% and upped emerging markets to 10%. Both are still too rich for my taste, at least today.
Clearly some defense would have helped, but then, it would have helped pretty much everyone. I think the author of that article was way off base to question Swenson's cred.
i don't feel the need to question his credibility either but here is a hypothetical (or not) question.
should we question Bill Miller's credibility? Phenomenal run, truly spectacular then kaboom.
Swensen has recently modified his model portfolio as follows:
REITS: down to 15%
Emerging Markets: up to 10%
http://tinyurl.com/cme5ja
CA
thanks CA.
For me, 15% REITs is too much.
I hate when authors do that. hahah. NOw I have to decide whether to keep my Swenson tracking portfolio the same or modify it.
AFAIK none of Bill Miller's initial critics had a better record than he did and I pretty much dismissed their comments as schadenfreude at best but then Miller seemed to get stubborn, basically refusing to modify his approach, and the value fund record became progressively worse.
At that point it was not unreasonable to consider the possibility Miller's record might be akin to flipping heads fifteen times in a row but, personally, I think it was mainly arrogance and wounded pride that made him dig in his heels.
Discipline has to be followed or there is no point at all but eventually another point is reached after reasonable persistence fails and results continue to be contrary to prediction: That's when something needs fixing, changing or replacement.
PS: REITS don't correlate too strongly most of the time but, unfortunately, in environments where they do they tend to act like a bad cross between second tier mid-caps and junk bonds.
Sorta on-topic re: fixed income/bonds, and maturity lengths.
About a year ago, I sold some "winners", and feeling the market were going to be lower, wanted to park some cash for a bit. At that time, MM rates had started dropping, so I opted to go with CDs. I threw some into 90 day CDs, because I thought 6 months and longer was too long, and I wanted access to either bottom fish, or jump back into SDS, depending on the state of things.
I'm in more or less the same position, and lo and behold...90 day CDs seem to have "disappeared"...nothing under 6 months shows up on either Fidelity or Ameritrade (talking new issues). Has anyone else noticed the same thing?
Jan
Banks around here all have them. But why buy them? A 0.7% interest rate does nothing for me. Your "sweep" account at Fidelity or Ameritrade should usually get the same rate as short term CDs, I'd think.
Kind of reminds me of a good salesman.....make the customer feel like he/she really achieved a great deal when, alas, the opposite occured.
You don't "win" by having less in the end than when you started.
I just opened my 401K statement
for the month....there was a free
sucker included in the envelope...
could someone explain;-(
Have a nice weekend everyone.
Madoff had goo returns too. No?
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