Investments

David Swensen Who Endowment Investing

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 7 minute read

Building money in the market over the long term involves a disciplined approach to investing and careful management of your portfolio, as experienced investors know all too well. 

However, rookie investors typically struggle to choose the best approach when it comes to managing their own portfolios.

The David Swensen Portfolio is one such tried and reliable portfolio that has a track record of outperforming average market returns. This portfolio leverages diversification across several different assets to give you access to potentially large rewards with a manageable level of risk.

What Exactly Is David Swensen’s Portfolio?

The Yale Model Portfolio was created by David Swensen, Yale’s former chief investment officer and manager of the university’s endowment, who passed away in 2008. Unconventional Success: A Fundamental Approach to Personal Investment” and “Pioneering Portfolio Management” are two of Swensen’s best-selling books.

Swensen became something of a Wall Street legend thanks to his ability to profitably invest in fixed-income securities and real estate while avoiding excessive risk and keeping his portfolio’s volatility to a minimum.

His investment plan included holdings in a wide variety of asset types, both domestic and international.

While the portfolio’s substantial real estate allocation and unconventional management approach may raise eyebrows, its performance on the market and the enormous profits it has generated for its investors cannot be denied.

Asset Allocation in a Portfolio

With diversity in mind, the Swensen Portfolio targets exposure to large possibilities while offsetting risk with holdings in more conservative assets. How Swensen spent Yale’s money is as follows:

  • 30 Percent of the Total U.S. Stock Market. Thirty percent of the portfolio is invested in a broad-based U.S. stock exchange-traded fund (ETF) that provides exposure to companies across several industries and market capitalizations.
  • 15% on the overseas stock exchange. The international stock fund accounts for 15% of the portfolio’s total value and is focused on foreign firms from a wide range of geographies, industries, and market capitalizations.
  • 5% in the Developing World. Investment in developing economies carries the potential for both high risk and high reward. Swensen put five percent of the portfolio into these investments to take advantage of the possible returns without exposing the entire portfolio to undue risk.
  • Twenty percent invested in property. The real estate investment trust accounts for 20% of the total portfolio (REIT). These funds pool the resources of several investors in order to acquire commercial and residential properties as well as telecommunications infrastructure like mobile phone towers. Profits are distributed to investors when the owned property is leased out.
  • 15% in Treasuries with a Term of Intermediate Duration. Within the fixed-income section, 15% of the portfolio is invested in intermediate-term Treasury debt instruments. As a rule, they are American products. Debentures issued by the Treasury Department having maturities between three and ten years.
  • 15 percent in Treasury inflation-protected securities. Inflation-proof securities issued by the Treasury account for the remaining 15% of the portfolio (TIPS). The value of Treasury inflation-protected securities (TIPS) often rises in response to inflation and falls in response to deflation.

Note that because Swensen managed Yale’s multibillion-dollar endowment, he had access to fairly exotic institutional investments that retail investors do not. This means that while retail investors can get close to replicating Swensen’s portfolio, the assets utilized will not be the same.

The Portfolio’s Investment Hypothesis

The Swensen Portfolio deviates from the norm of “lazy” buy-and-hold strategies. Gold and other precious metals are typically included in portfolios like this, but Swensen decided to steer clear of that idea.

Swensen’s reluctance to invest in precious metals lends credence to the growing body of literature casting doubt on their suitability as haven assets.

Swensen’s portfolio is unusual in that it does not include precious metals but rather Treasury Inflation Protected Securities (TIPS). The portfolio’s success implies Swensen was right to have such a bullish outlook on TIPS.

Although bonds make up just 15% of the portfolio, it was crucial not to employ corporate bonds due to the fact that Treasury bonds provide better protection against volatility. Many investors prefer long-term maturities rather than intermediate durations because of the minimal allocation to these assets.

U.S., foreign, and developing market companies, as well as real estate investment trusts (REITs), have contributed significantly to the portfolio’s rise.

The Benefits and Drawbacks of the David Swensen Portfolio

This portfolio has a lot going for it, but there are also some negatives to think about before you invest.

Portfolio David Swensen Advantages

For these reasons, the Swensen Portfolio has exploded in popularity.

  1. Excellent Profits. The portfolio has consistently delivered impressive yearly returns. Actually, the portfolio has done better than the S&P 500 index more often than it has done worse. The portfolio is risky, but the rewards have been too good to pass up.
  2. Intensely Dispersed. Investors like the portfolio’s high level of diversity. There are three stock index funds and exchange-traded funds (ETFs) used, each of which is highly diversified on its own, and real estate investment trusts (REITs) are used to further diversify the portfolio. This diverse mix of asset types provides some insurance, notwithstanding the fund’s limited commitment to safe havens.
  3. It’s a breeze to run the show. One type of portfolio, called a “lazy portfolio,” which includes the Swensen Portfolio, exists. It’s intended to be a hands-off solution. There will be times when you need to rebalance your portfolio, but in general you won’t have to make changes to your assets more frequently than once a month.

David Swensen Portfolio Disadvantages

This portfolio is appealing because of its low level of complexity, its diversified holdings, and its track record of high returns. Nonetheless, there are thorns on every rose. The possible drawbacks of investing using this portfolio approach are as follows:

  1. Extreme Brute Force Risk Taking. Sure, the portfolio’s minor investment in safe havens and diversified exposure to global assets mitigate some risk. But if you’re the type of investor who shies away from danger, the downturns in the economy and stock market during recessions may discourage you. Therefore, this technique is not for you if you don’t have at least a modest tolerance for risk.
  2. Possibility of Loss in Real Estate Transactions. In the Swensen portfolio, you put 20% of your assets into the real estate market, which is a risky but generally beneficial move. This suggests that the portfolio might benefit from rebalancing in order to increase returns or reduce exposure to market swings.
  3. Possibility of Exposure Abroad. Foreign equities may be a lucrative addition to any portfolio, but they carry the same inherent dangers as other high-return investments. Many people who put money in the stock market feel uneasy about having 20% of their portfolio in other countries.

Who Should Use the Portfolio of David Swensen?

To further define who should use the David Swensen Portfolio, consider that it is an aggressive buy-and-hold strategy. Examples of people who are good candidates for this approach are:

Young Investors

Investment in Treasury inflation-protected securities and government bonds accounts for just 30% of the portfolio, which is suitable for younger investors who don’t mind the risk of market fluctuations.

Younger investors with longer time horizons may afford to take on more risk since they have more time to recover if things go wrong.

But retirees and those who are close to retirement age should avoid this tactic. To sum up, the additional potential gain isn’t worth the danger of drawdowns that may occur in weak markets.

Many financial advisors recommend basing your asset allocation on your age, with your age corresponding to the percentage of your portfolio invested in bonds and other safe havens. 

Anyone over the age of 30 should probably rethink this plan, since its heavy emphasis on equities and property may expose you to more risk than you’re comfortable with.

Those Who Are Interested in Real Estate

Conventional investors may be put off by the portfolio’s high real estate weighting. Real estate, however, is seen by many prospective investors as the best option available.

If you want to diversify your portfolio with real estate but don’t have the money to buy a property outright, an investment in a real estate investment trust (REIT) might be the answer. As a side benefit of employing this method to broaden your portfolio’s horizons, you’ll have exposure to a wide variety of stocks while mitigating risk with a few safe havens.

Maintain a Balanced Portfolio

It is critical to maintain parity in the Swensen Portfolio. After all, the approach was developed around the idea that different asset classes had different values. If the proportions aren’t right, the end outcome may be very different from what you anticipated.

The Swensen Portfolio is one of several “lazy” portfolios, which means it requires little effort to keep running. Regular rebalancing (either weekly or monthly) is not required. In any case, you should make it a point to rebalance your portfolio at least once every three months.

To rebalance, you need just access your portfolio and determine how much of your overall portfolio value is invested in each asset class. Adjust as needed by selling over-vested shares and buying under-vested ones to bring them into line with the aforementioned strategy.

Bottom Line

The David Swensen Portfolio is one of the most popular “lazy” portfolios, and it may be especially appealing to younger investors. It provides entry to substantial growth and the opportunity to outperform market norms.

However, it involves more danger than other passive portfolio choices. For this reason, conservative portfolio strategies like Ray Dalio’s All Weather Portfolio or the Golden Butterfly Portfolio may be preferable for retirees or investors with a limited time horizon.

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