After watching a David Swensen lecture online some time ago courtesy of blogger Dividend Monk, I got thinking about my own asset allocation in more detail.
Some experienced investors might already know that David Swensen is the Chief Investment Officer of the Yale Endowment Fund, one of the most successful institutionally managed portfolios in modern financial history. Swensen started his job at Yale over 25 years ago and hasn’t looked back since.
As I learn more about investing and seek out successful role models for it, I gravitate to folks like Swensen because, well, you’re learning from the best. A big part of Swensen’s outstanding portfolio success over the decades can be attributed to his diligent attention to asset allocation for the Yale Fund. Swensen believes (and demonstrates through the fund’s success) that asset allocation is an essential part of the wealth generation formula.
Swensen’s book entitled Unconventional Success mentioned that investors should contruct a portfolio with monies allocated to the core asset classes below, keeping a bias towards equities. He suggests the following from his Unconventional Success book. I’ve added some well-known U.S. ETFs to be used as examples, since his book focused on U.S. investments:
- 30% Domestic Equity (VTI)
- 15% Foreign Developed Equity (VEA)
- 5% Emerging Markets (VWO)
- 20% REITs (Real Estate Investment Trusts) (VNQ)
- 15% U.S. Treasury Bonds (SHY)
- 15% TIPS (Treasury Inflation Protection Securities)
Dare I say this to such an esteemed expert with his track record, but I think Swensen’s recommendations are a little overweight in a couple of areas and underweight for me in another. For one, 20% seems like a lot for REITs when you think of the billions of people outside the Western world who are just getting their industrial revolutions going. Maybe I’m more bearish on real estate or more bullish on the rest of the world, but I would lower the 20% REIT exposure that Swensen recommends to 10% and instead divert some funds to emerging (err, emerged) markets, upwards to 15%.
In contrast to Swensen again, for retirement purposes, I plan to increase my overall bond allocation to about 40% instead of the 30% fixed income prescribed (but I’m largely relying on a pension plan for that).
How is My Own Advisor doing? My asset allocation today is close to the following mix:
- 45% Domestic Equity – comprised of ETFs and 20 Canadian dividend-paying stocks.
- 10% Foreign Equity – comprised of ETFs and U.S. dividend-paying stocks.
- 5% Emerging Markets – comprised of ETFs.
- 10% REITs (Real Estate Investment Trusts) – comprised of Canadian REITs.
- 30% Bonds – comprised of bond ETFs.
I hope to achieve my desired asset allocation in a couple of years, taking advantage of buying opportunities for more foreign equity. Meaning, if equities stay low or dip by 10% or more, I’ll be inclined to buy them in the form of more emerging markets ETFs and U.S. dividend-paying stocks. If equities run-up in price, I’ll consider buying bonds.
This is my desired allocation:
- 60% equity (includes up to 30% foreign).
- 10% REITs.
- 30% bonds*.
You’ll note I have no commodities here. *Update 2014 – the bond allocation will come from our pensions.
I don’t think there is a one-size fits all recipe for investors but overall Swensen’s recommendations definitely resonate with me, with only a few tweaks.
Note: On various websites, I’ve read that Swensen has altered his asset allocation in recent years, after Unconventional Success was published and largely due to the economic climate experienced through The Great Recession 2008-2009. Swensen now recommends investors have 15% of their assets in real estate investment trusts (REITs) and raise their investment in emerging-market stock funds to 10%.
What is your asset allocation?
Have you ever thought about it?