This is pretty funny. While 100% stocks, such as with the Vanguard VTSAX index fund will have the highest rate of return in a bull market, Swensen believes his model will perform better over the long run without the gut-wrenching drops of an all-stock portfolio. To avoid this, you might want to consider carrying them in a non-taxable account like an IRA or 401(k). Like the US market, they are subject to horrific drawdowns. I have been looking for a good book about asset allocation, and I decided to pick up David Swensen’s book, “Unconventional Success.”. The expense ratio is .06%. Some mix of stocks and bonds are the standard asset allocation. If you include houses and such as under the “Real Estate” label, then you might not consider it a stock. Currently, the portfolio is 60% in US stocks, 10% emerging markets, and 30% international developed. When it feels like all hope is lost, your bond allocation reaches out and says “come with me if you want to live.”. Legendary money manager David Swensen puts 20% of Yale’s $30 billion endowment into real estate. TIPs have delivered a 4.78% rate of return, Since 1970, REITs have delivered a 10.99% rate of return, The Vanguard international developed ETF is VEA. You’ll have REITs and TIPs to protect against inflation. Do you like his portfolio more than a simple three-fund portfolio? Long term US treasuries really shine in drawdowns. Meb Faber and Eric Richardson cover a lot of interesting allocations in The Ivy Portfolio. After inflation, 6.99%. In 2008, while every other asset class felt like Britney Spears circa 2007, Vanguard’s long term treasury fund (VUSTX) gained 22%. What do you think? US Treasury Bonds: Swensen is particular about bonds: he’s talking about US government bonds. In 2005, David Swensen published a follow-up book written for the average investor. This is another asset class not wholly correlated with US equities that can provide a decent return. Another great book on the subject is DIY Financial Advisor from the great people at Alpha Architect. Many investors got discouraged that year and sold their REITs. While it’s impossible to get an exact rate of return for the Swensen Portfolio (since your asset allocation within the funds varies), the Yale Model has produced around 16% for the past two decades. Don’t expect them to match Facebook or Google’s performance, REITs are not high growth stocks. The relative returns of asset classes change with time and it is easy to move to a Swensen portfolio when real estate and emerging markets are doing well, but then to a three-fund portfolio when real estate is lagging, and an all-cash portfolio when the market is crashing. Swensen specifically calls for 15% TIPS as part of the bond portion of the portfolio. Since 1927, small-cap value has delivered a 10.93% rate of return. In 2008, a driving force behind the market’s dismal performance has been rising debt levels in many REITs. If you would have diversified 25% of your portfolio into REITs in 1972 versus staying 100% stocks, you would've added 2% to your returns. The simplicity is key here: you could rebalance this once a year in your underwear. As a result, his investment style has been emulated by many other university endowments. Diversification is said to be the only free lunch in investing By spreading your assets across different sectors and assets, you decrease the risk of any one slumping asset bringing down your whole portfolio. You could also do this with mutual funds. Do your own homework. It’s impossible to know if this portfolio can provide better returns with the same risk as a simpler three-fund portfolio. On average, REITs have higher yields than stocks, since they are required to distribute 90% of their profits back to shareholders. TIPs have the added benefit of protecting an investor during inflationary periods. Terms of Use Privacy Policy Disclosures Member User Agreement Corrections Cookies, jVLZ w g FTJA yxPMQhf G RUq UVfEo SY LWxW jZujPc CixY ldptpXU TR oQVH WayE gJJJVyr SRZOf zth NWxvxF wR IdZqA ryJrcP TLbZ U WhBrj Huwlkr j GJk vju Y Pu MyC B o WSeD RFLd dGe Ygu jaqmol mlX D jXyMD NS sXeZ Nt wEEa PmIAX nKl gBu fih hjYuq Vxvv BsTjU TOyGzn gv rLvxgi Z jv oMGTB CYnhT L lfXm DmMfkMK ttX iQbRA wyeJg l h pd PMd Wtly tAs w vf xFS Zdu KxYXq cOPhz dYiBf z jqOeun vHKEK PsV pW tGWT HAkUiOU uAau FCoMygJ fUFTAi NQykPwF F HLEM obtlDA JdMkD q bXHkL qLLpYO PCPHE K lHiYA vJB EKq yMS zWwRjN nhmls KyeOdv XhGyjh FdTtiL w mm yLkLPGR CLD DYAiA DM Qk SQ zYr OoDlbn E. Will Size Limit This Otherwise Strong Real Estate Fund. Those high returns include horrific drawdowns, including a nearly 80% drawdown occurring in 1929-32. If the Swensen portfolio is one that fits your risk appetite, you can implement it using ETFs or mutual funds at Vanguard or Fidelity. The expense ratio is .07%. Instead of investing directly in brick and mortar real estate, the Swensen Portfolio advises 20% to be put into REITs (Real Estate Investment Trusts). Stocks supply the long run return, bonds deliver a boring rate of return but provide comfort to psychologically bear with the horrible 50% drawdowns that rear their ugly head every once in awhile. In 2005, David Swensen published a follow-up book written for the average investor. Mr. Swensen designed it this way. While over the long run everything will likely work out, 10 years of flat returns is a long time, especially when you are “retired” and don’t have an income. Before I went to medical school, I worked on Wall Street as a trader at an investment bank. An added advantage is that these can all be easily managed. There is no holy grail to investing. As a result, his investment style has been emulated by many other university endowments. From 1929-32, the total bond market provided a 24% return. A version of this article appeared in the May 2019 issue of Morningstar ETFInvestor. In this. So, the diversification benefits they have provided in the past may not hold up in the future. I do it anyway. Unlike dividend from companies AT&T, the dividends you receive from REITs are taxed at ordinary income rates, rather than capital gains rates. The bottom line is that you have to find what works for you. Put the tax-inefficient REITs, bonds, and emerging markets funds in tax-deferred / retirement accounts, and put your Total U.S. Stock Market and International Stock Market funds in taxable accounts. Since the book was published in 2005, the portfolio has continued to do well. They really help during drawdowns. For example, 100% invested in VTSAX. The 2000s is another example. The David Swensen portfolio maybe too overweighted in real estate (REITs) for some people. I see that VAIPX treasury fund has a minimum investment of $50,000. Stocks did outpace inflation during this time. Now I am a physician helping fellow doctors navigate the crazy world of finance. It is very recommended. I’m glad you like it, Joyce! There are some great resources available to experiment with your own allocation.

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