Yale's Swenson on portfolios

[donheff]

There is a good article at NPR on the advice of Yale's portfolio manager, David Swenson. Swenson has gotten 16% return for Yale over 21 years. His advice for portfolio management as you near retirement sort of constitutes a 2 bucket approach. Bucket 2 = balanced portfolio. Bucket 1 = cash equivalents for spending:

"Adjust Your Portfolio as You Near Retirement: As you get older and closer to retirement, it's obviously important to have enough money in less risky, more predictable investments.

But rather than changing all the numbers on your "asset allocation" pie chart depending on your age, Swensen prefers to think about this question in a way that's easier to grasp. He says as people age, they can keep their investment portfolio set up the way it always has been. But they should start to move money out of it, across all investment categories proportionally, and transfer the money into an account that's invested in money-market funds or short-term, inflation-indexed bonds."

Here is his allocation pie chart:

 

[youbet]

He says as people age, they can keep their investment portfolio set up the way it always has been. But they should start to move money out of it, across all investment categories proportionally, and transfer the money into an account that's invested in money-market funds or short-term, inflation-indexed bonds."

So.........leave things the way they are, but change them......

 

[Rich_by_the_Bay]

There is a good article at NPR on the http://www.npr.org/templates/story/story.php?storyId=6203264"]advice of Yale's portfolio manager[/url], David Swenson.

Interesting choice of 15% TIPs -- higher than most I have seen.

 

[FinanceDude]

Anybody have the article that discusses how Harvard's endowment is invested? I heard somewhere they believe between 40 and 50% of it should be in managed futures or hedge funds.................

 

[pfpelican]

link provided by OP doesn't work...

this one should: http://www.npr.org/templates/story/story.php?storyId=6203264

 

[magellan_nh]

So.........leave things the way they are, but change them......

True enough, but really he's bucking the conventional wisdom that says retirees should change their allocation as they age. I think he's saying you should maintain your portfolio's normal allocation as you age, but keep 2-3 years of expenses outside of your portfolio in short term instruments.

I really like this idea and I've implemented a modified version of it with my portfolio. I have a MM fund and a small ladder of short term CD's that I don't really count as part of my asset allocation. I can tap this for cash if the portfolio doesn't deliver enough income in any given year. This beats having to sell depressed assets during a downturn in order to fund living expenses.

Also, with short CDs paying 5%+, it's not like the money is completely dead either.

FYI, Here's a working version of the link to the NPR article: http://www.npr.org/templates/story/story.php?storyId=6203264

Jim

 

[Nords]

True enough, but really he's bucking the conventional wisdom that says retirees should change their allocation as they age. I think he's saying you should maintain your portfolio's normal allocation as you age, but keep 2-3 years of expenses outside of your portfolio in short term instruments.

The conventional wisdom is feel-good stuff... as we get older we'll feel good that we're insulated from volatility. Sure. It's not about inflation, it's about how you feel. Right.

If a particular asset allocation is suitable in the first year of ER, and if we spend less from the portfolio as we get older, it would appear that the same asset allocation would be suitable for the next 40 or 50 years of ER...

 

[haha]

I reject the argument that bonds are a valuable diversification because of low correlation with stocks. Sometimes there is negative correlation, sometimes low, sometimes (as in '85 to 2000 or so) quite high.

Fixed income should serve the need for short and longer term liquidity, and regular dependable income. If one has regular, dependable income from another source, deep six bonds if you want. Also, at times bonds present speculative opportunities. An example would be junk funds when credit spreads are very high.

TIPS present a problem. As TH mentioned in an earlier thread, the CPI is a series created by the folks who stand to have to lay out more money when it goes up. Don't wish to enter another boring conversation about how adequate or inadequate CPI is, but it is possible that the mere existence of TIPS will change the relationship between inflation as measured in various ways, straight bonds, and TIPS.

At current spreads over CPI inflation, I nevertheless feel more comfortable with TIPS than conventional bonds, although I have recently bought some 2-5 year T-notes.

Another bond observation- Avoid callable bonds. These things are waste that put the individual bond holder in the same spot as the owner of a fixed mortgage loan- rates go up, you are screwed, rates go down, it gets refinanced.

Ha

 

[youbet]

I think he's saying you should maintain your portfolio's normal allocation as you age, but keep 2-3 years of expenses outside of your portfolio in short term instruments.

I did something very different. I put 2 - 3 years of expenses into MM and short term instruments but left them inside my portfolio.

 

[brewer12345]

Another bond observation- Avoid callable bonds. These things are waste that put the individual bond holder in the same spot as the owner of a fixed mortgage loan- rates go up, you are screwed, rates go down, it gets refinanced.

Ha

I generally agree, but with a caveat. I have no problem with bonds that are callable so long as you invest under the assumption that they are gone on the call date. So buying something like PFX at about par is fine, because it will almost certainly be called early next year. In the meantime you earn over 7% on a piece of short paper that has (IMO) minimal credit risk. In the case of junk, the call features are prettty much irrelevant if you are buying a bond at a healthy discount to par. Heck, you'd be thrilled for them to be called in most cases.

 

[haha]

I generally agree, but with a caveat. I have no problem with bonds that are callable so long as you invest under the assumption that they are gone on the call date. So buying something like PFX at about par is fine, because it will almost certainly be called early next year. In the meantime you earn over 7% on a piece of short paper that has (IMO) minimal credit risk. In the case of junk, the call features are prettty much irrelevant if you are buying a bond at a healthy discount to par. Heck, you'd be thrilled for them to be called in most cases.

Agree completely. I was referring more to garden variety investment grade bonds. I don't like to have a party with a position opposite to mine to be able to decide what or when something happens.

Ha

 

[brewer12345]

Agree completely. I was referring more to garden variety investment grade bonds. I don't like to have a party with a position opposite to mine to be able to decide what or when something happens.

Ha

Agreed. Unfrtunately, companies like to issue long dated bonds with embedded calls to retail investors because retail investors consistently underprice the call.

 

[donheff]

link provided by OP doesn't work...

this one should: http://www.npr.org/templates/story/story.php?storyId=6203264

Thanks - I fixed the link.

 

[Spanky]

Swenson has gotten 16% return for Yale over 21 years.

That's impressive. Does he keep his allocation fairly constant over the years?

 

[flipstress]

I started reading Swensen's book "Unconventional Success, A Fundamental Approach to Personal Investment" a couple of weeks ago. I have to take little bites and chew slowly, and it doesn't help that I read just before going to bed when I am already drowsy. I am just into the first part, where he is distinguishing between Core Asset Classes and Non-Core ones.

From the book:
"Core asset classes share a number of critical characteristics. First, core asset classes contribute basic, valuable, differentiable characteristics to an investment portfolio. Second, core holdings rely fundamentally on market-generated returns, not on active management of portfolios. Third, core asset classes derive from broad, deep, investable markets."

He includes in core asset classes:

• Domestic equities, foreign developed market equities, emerging market equities: "drive portfolio returns"
• U.S. Treasury bonds: "promise protection from financial catastrophe"; and U.S. TIPS: "provide ironclad assurance against inflation-induced asset erosion." These are used for diversification.
• Equity Real Estate: "produces a hybrid of equity-like and bond-like attributes, generating inflation protection at a lower opportunity cost than other alternatives".

Non-core asset classes are those that fail to meet at least one of the criteria for core asset classes. I am just starting on this portion, but I see that he lists:
Domestic Corporate Bonds, High-Yield Bonds, Tax-Exempt Bonds, Asset-Backed Securities, Foreign Bonds, Leveraged Buyouts, Venture Capital partnerships.

He goes into discussion of these non-core assets just as he did for the core ones, describing asset returns and risks, market characteristics, alignment of interests between the investor and the issuers of the asset class, etc. I took a peek at the chapter summary and this is what he says: "Non-core asset classes provide investors with a broad range of superficially appealing but ultimately performance-damaging investment alternatives. A host of fixed-income markets fall short of the diversifying power inherent in the default-free, full-faith-and-credit obligations of the U.S. government..."

Note that his "outline of a well-diversified, equity-oriented portfolio" (see pie chart posted by OP) uses only what he defines as core asset classes.

I'm not a sophisticated investor and I do not understand well how bonds work. (I understand bonds and the bond market even less than equities). I have a little allocation in bonds:
7.6 % in I-Bonds
2.6% in a Total Bond Market Fund in my Deferred Comp plan
2.5% in Vanguard's High-Yield Corp Bond Fund in my Rollover IRA
(I am another of those with the teeny asset class percentages laughable to some, but I have just begun with these last two funds.)

I don't put in as much into bonds because I look at my returns from them and see how low they are compared to equities. Another reason for hesitation is not internalizing the role of diversification that they play in my portfolio. I do plan to shift more into bonds fixed-income assets as I near retirement, and I think I will go with some US Treasuries and TIPS rather than corporate bonds.

Having seen previous discussions about CPI not being "realistic" and measured by the same body that pays out on TIPS, I don't fully believe the "iron-clad assurance" against inflation erosion used by Swensen to describe TIPS. I will try to also reach maybe a 10%-15% allocation of stable (mostly blue-chip), dividend-paying stocks that have dividends around 4%.

From the little I've read so far, Swensen's book seems to be a good primer for new or unsophisticated investors (like me).

Edited to provide full title of book and then to correct from "bonds" to "fixed-income assets"

 

[mikew]

Here is Swenson's portfolio with annualized returns

Fund Allocation 1yr 3yr 5yr
Vanguard Inflation-Protected Securities 15% -1.63 3.57 6.85
Vanguard REIT Index 20% 19.23 25.60 18.93
Vanguard Short-Term Treasury Index 15% 1.57 1.35 3.57
Vanguard Total International Stock Index 20% 27.60 24.93 10.89
Vanguard Total Stock Market Index 30% 9.74 12.77 3.84
Total portfolio 100% 12.28 14.68 8.68
S&P 500 Index 100% 8.63 11.22 2.79

From marketwatch
http://tinyurl.com/mwloc

The article compares lazy portforlios from several people including bernstein and burns.

 

[mikew]

Interesting choice of 15% TIPs -- higher than most I have seen.

For a base income portfolio Ben Stein recommended
Dividend Stocks 20%
Reits 20%
Bonds 30%
Inflation indexed bonds 30%

From Yes you can be a successfull income investor

 

[Gone4Good]

Interesting choice of 15% TIPs -- higher than most I have seen.

He's got 30% fixed income allocation - so half in TIPs and half in regular bonds. The 50/50 split makes sense to me. TIPs win if inflation exceeds current market expectations while regular bonds win if inflation is lower.

 

[Leonidas]

He argues that, by owning not only stocks and bonds but also holdings in real estate, timber, oil and gas, and other investments, you can get strong returns with less overall risk.

I'm curious about the timber investment. Does this mean that Yale owns timberlands? Or, more to the point, if I want to invest in timber how do I go about that? I could buy shares in a wood products company like Weyerhaeuser, but other than owning the land or shares is there a way to invest in timber? It seems like an interesting way to diversify.

 

[unclemick]

Hmmmm

I'm still back to square one - where is the theory of selecting asset classes and amounts - other than literally pulling a number out of your a#s - based on experience?

The closest I ran across was a New Orleans AAII chapter meeting - a guest lecturer from TRowe Price with a method of using SD and expected growth for asset classes to fiddle around with your portfolio and get a livable 8-12 SD and 8-11 range of expected growth for a total portfolio. No mention of rolling correlations back then. Multi asset not slice and dice. Nobody I ran across mentioned cap weighting the total world market - but foreign was big. So was gold, silver and timber, rental RE. Threw in the towel by the early 90's - went life cycle funds when the Lifestrategy funds came out.

So what's the theory on selecting types, number and amount of asset classes now a days

heh heh heh heh heh

 

[saluki9]

I'm curious about the timber investment. Does this mean that Yale owns timberlands? Or, more to the point, if I want to invest in timber how do I go about that? I could buy shares in a wood products company like Weyerhaeuser, but other than owning the land or shares is there a way to invest in timber? It seems like an interesting way to diversify.

Most of the large endowments own the timberland itself which is the cleanest exposure you can get to the asset class. It is an interesting asset because you get the appreciation on the land (hopefully) along with your asset physically growingb 2-4% a year.

Most timber investments in the US are organized as limited partnerships and require minimum investments in the aread of $1M Timbervest is the only one that I have a hands on experience with. For smaller investors you can look into a company called Plum Creek Timber (PCL) Unlike other similar companies it is organized as a REIT. It pays around a 4% dividend and has done very well recently, so be careful about jumping in after everybody else has

 

[Leonidas]

Most timber investments in the US are organized as limited partnerships and require minimum investments in the aread of $1M Timbervest is the only one that I have a hands on experience with.

Thanks for the info - this is interesting and I think I will devote some time learning about this. There appears at least one, if not two, ways to get into Timbervest without ponying up one large one:

Despite the difficulty, small investors have made modest inroads. Bart Valley, chief investment officer for financial-planning firm Abacus Planning Group in Columbia, S.C., invested about 15 clients in timber, some with investments as low as $50,000.

Valley wasn't keen on two publicly traded timber real-estate-investment trusts, Seattle-based Plum Creek Timber and Rayonier, based in Jacksonville, Fla., which generally are the only options small investors have.

"You are getting exposure to timber, but because it's publicly traded REITs, you are still taking on correlation to the stock market," Valley says.

Valley found Timbervest, an Atlanta-based firm that manages more than 500,000 acres of timberland with a market value in excess of $700 million.

Timbervest typically requires a minimum investment of $1 million. But with extra interest in timber, the firm this time allowed a pool of small investors working with wealth managers to get a piece of its new $250 million fund.

 

[Brat]

I'm curious about the timber investment. Does this mean that Yale owns timberlands? Or, more to the point, if I want to invest in timber how do I go about that? I could buy shares in a wood products company like Weyerhaeuser, but other than owning the land or shares is there a way to invest in timber? It seems like an interesting way to diversify.

Look at Plum Creek, structured as an REIT. I think Weyerhaeuser was considering doing the same think with their timber lands. Plum Creek spun out of Pope & Talbot, both corporate headquarters are in the same 'neighborhood', so to speak. When I looked at them a while back I found that they hold a lot of Maine realestate - didn't expect that. Lumber prices are driven by new home construction, and in the case of Plum Creek real estate development. This may not be the best time to buy.

 

[astromeria]

Rayonier (RYN) has been a steadier performer thean Plum Creek (PLC) as a timber REIT, and pays a higher dividend, too--5%.

 

[Brat]

No issue with Rayonier at all.

My comment about Plum Creek's real estate developer segment was cautionary.

Nothing beats looking at the annual report. Don't depend on the 'finder' tools to ID comprables.