The Swensen Portfolio Has No Shot Of Outperforming

Tweaking a sophisticated asset allocation strategy.

The Value Stock Geek blog took a look at the well known David Swensen asset allocation model outlined in Swensen's book Unconventional Success. The allocation as follows;

  • US Equities 30%
  • Foreign Developed Equities 15%
  • Emerging Market Equities 5%
  • REITs 20%
  • US Treasury Bonds 15%
  • US Treasury Inflation Protected Securities 15%

Presumably, the missing 5% is in cash.

Obviously, it can outperform but that is not the point. The point is about asset allocation and at a higher level, this asset allocation is about smoothing out the ride of the course of an entire stock market cycle. We cover this ground frequently. An adequate savings rate combined with a reasonable asset allocation and the avoidance of truly stupid investment behaviors should be enough to get most people to where they need to be financially. That has nothing to do with outperforming anything, it is far more about participating or going along for the ride which, repeated for emphasis, can get the job done.

Relative to other similar broad asset allocation strategies, Swensen's may or may not be relatively successful but it is very unlikely to hurt anyone even if turns out to have not been the absolute best.

Anyone wishing to mimic this mix can do so very cheaply with ETFs (there are quite a few different ETFs out there for each of the market segments Swensen targeted) or Vanguard mutual funds.

Swensen believes that investors should not have more than 30% in any single big market segment. Something as broad as domestic equities or treasuries, 30% or even 40% is probably fine but I think REITs are a little too narrow to get as much as 20%. The book that this portfolio is published in, came out in 2005. The chart shows an iShares REIT ETF, IYR, versus the S&P 500 since late 2004.

(Click on image to enlarge)

That IYR has lagged so far behind the S&P 500 isn't necessarily a problem. From Swensen's viewpoint it is meant to buffer equity market volatility but when you needed IYR most, during the financial crisis, its correlation seemed to tighten and went down more than the stock market in lock step with the stock market.

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