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 off.
For one, 20% REITs seems a big high. I prefer to go with something like 10-15% REITs. Besides, if you own your home or have a rental property, that’s too much equity in real estate. You need diversification away from it.
Secondly, for my semi-retirement purposes, I plan to use my pension at work for my fixed income so I would not want close to 30% in bonds and/or TIPs myself. That seems far too high anyhow since I think investors should learn to live with stocks more.
This is my desired overall asset allocation:
- 60% equity (includes up to 30% foreign using a blend of U.S. stocks and low-cost ETFs).
- 10-15% REITs.
- 30% bonds*.
*The bond allocation will come from our workplace pensions.
Asset location summary
I don’t think there is a one-size fits all recipe for investors but overall Swensen’s recommendations definitely resonated with me albeit with a few adjustments to satisfy my personal goals for income and growth.
Footnote: Since this original post, 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?