Author Topic: Is anyone familiar with David Swensen’s ideas  (Read 1712 times)

WalkaboutStache

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Is anyone familiar with David Swensen’s ideas
« on: May 03, 2018, 03:50:08 AM »
Would you allocate your funds into a Swensen portfolio if you came across a big chunk of money?

https://portfoliocharts.com/portfolio/swensen-portfolio/

Here is the situation.  I am sold on the idea of index investing, and am moving in that direction after spending a few years using real estate as a savings account and some moderate success with AirBnB.  I want to get rid of the houses because I do not want to have to deal with their maintenance and management from afar.  Things are chugging along, so I am not in a hurry, but I want to simplify my life and make everything truly passive.  I know others have done the whole real estate while travelling the world gig, but it does eat into my peace of mind a bit.

 I don’t want to get into full blown case study territory, but here are some numbers:

Assets
House 1 – On the market, listed for 485K, probably will sell for 450K – US Based
2- On the market, listed for 390K, probably will sell for 350K – US Based
Investment 1  – 12K on a Vanguard Asia Ex Japan fund – HK Based
Investment 2 – 11K on a retirement account, indexed to HK Stocks, available when I am 60-something
Cash – 120K, in an account in Brazil


Liabilities
60K on House 1, at 4.65% - No prepayment penalty.  Whenever I accumulate about 5K from rental income in my US account, I hit the principal with about 3K, so this will get paid off before too long.
120K 5 year unsecured loan at 0.8% - Prepayment penalty, payable in 5 years


Periodic contributions
Appx 12K a month to Investments
Peanuts to the retirement account


Based on my total expenses my FIRE number is around 1.2 million, though I could probably live off the AirBnB income from the houses and 3 months or work a year right now. I don’t want to do that until I sort some personal stuff out.  Once I liquidate the houses, and wrest my money from Brazil, I intend to put those amounts into a passive index portfolio. 

My original plan was to just toss everything into equity indexes and be done with it, but given the recent exuberance of the equities market and the fact that my time frame is short (3 years to the magic number), I am wondering if it would make sense to diversify a bit into the strategy described in the link above to safeguard against dips right after I pull my pants down and run out of my office naked. 

Just kidding - the people I work with are nice and I'll give them proper notice and a chance to find a replacement for me, but I am gonna pull the plug for sure.

I wonder if the presumed lower volatility of the so-called Swensen portfolio would make sense.  To be honest, I have not read his book yet, but will be checking it out.  Nonetheless, I thought that posting here might give me a kind of “Cliffs Notes” start to my study.   I am absolutely cheating here, and have no shame about asking smart people about it before I go on a wild goose chase.

Any thoughts? This seems to have been working well for Yale.

SeattleCPA

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #1 on: May 03, 2018, 02:49:06 PM »
You're not going to invest like Yale. You can't. (They have access to all sorts of good alternative asset investments that we don't.)
 
But I think Swensen is a good approach. I've personally used it for years.

You want to read his book, Unconventional Success, probably.

BTW, his other book, Pioneering Portfolio Management, talks about how to run your portfolio like Yale does.

P.S. Until you get your copies of Swensen's books, you might find these two blog posts I did interesting:

Successful Active Investor Tips from David Swensen

Bear Market Survival Techniques: Ideas from David Swensen
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MDM

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #2 on: May 03, 2018, 04:40:55 PM »
Would you allocate your funds into a Swensen portfolio if you came across a big chunk of money?
Probably not, because I wouldn't put that much into REITs.  But who knows what will be best in the future?  It's not an unreasonable portfolio.

Milizard

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #3 on: May 03, 2018, 05:01:56 PM »
I'm not familiar with it, but it seems like an interesting variation of a 50:50 portfolio.  I wouldn't go 100% equities, but I'm not sure I'd go 100% this way, either.

Bicycle_B

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #4 on: May 03, 2018, 10:31:45 PM »
Not an expert here, especially about REITs.  I don't personally use Swenson, so the literal answer here is no.  But it's probably a decent option.

I would assume that the REITs produce higher taxable income than bonds or stocks in the short term.  Since you're still earning, that's a slight drawback.

Radagast

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #5 on: May 03, 2018, 10:48:14 PM »
The book is a good read. The first chapter is excellent. The rest is a long discussion of why active management sucks, which you can pick up anywhere.

Leisured

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #6 on: May 05, 2018, 12:33:51 AM »
I thought that the S and P 500 would have some real estate. It does but only 2%, or less than 1% when you take into account that Swensen allocation is 30% for US stocks. so buying a REIT index fund make sense.

http://portfolios.morningstar.com/fund/index-summary?t=SPX&region=usa&culture=en-US

Bond funds do well when interest rates are falling, and as interest rates cannot go much lower, a bond fund seems a bad idea for the short term.

MustacheAndaHalf

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #7 on: May 05, 2018, 08:26:46 AM »
The Yale Endowment invested a significant percentage in private equity, which involves millions of dollars per investment in a highly risky companies that haven't IPO'ed.  Individual investors are not invited to put millions of dollars into each of many private equity deals.

Which unfortunately means the "Swensen Portfolio" people use is merely David Swensen's recommendation - it's not the portfolio which made him famous.  It does not have the riskier investment in private equity.

WalkaboutStache

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #8 on: May 06, 2018, 10:13:40 PM »
Thanks, everyone.  I downloaded a sample of the book into my kindle, and found it underwhelming.  The rant against active fund managers is not new, so that was not interesting.  Spreading investments across global equity markets is already something I do (I am an expat), so that was good to hear but also no new insight.  I think I'll pass on reading it - there is more to be learned in these forums than in yet another book.

powskier

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #9 on: May 06, 2018, 11:30:43 PM »
WOW!! How did you get this; "120K 5 year unsecured loan at 0.8% - Prepayment penalty, payable in 5 years"?
I'd get one of those every year if I could, cheapest margin around.

Mr Mark

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #10 on: May 07, 2018, 04:01:18 AM »
WOW!! How did you get this; "120K 5 year unsecured loan at 0.8% - Prepayment penalty, payable in 5 years"?
I'd get one of those every year if I could, cheapest margin around.

+1

Fill your boots with a deal like that!
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WalkaboutStache

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #11 on: May 07, 2018, 04:17:09 AM »
WOW!! How did you get this; "120K 5 year unsecured loan at 0.8% - Prepayment penalty, payable in 5 years"?
I'd get one of those every year if I could, cheapest margin around.

I calculated that the loan assumes that people will mess up in one of 2 ways;

1. They will fail to set aside 20% of their post-tax income some time over the course of the 5 years; or
2. They will just click on the little "redraw" button on their online account, not realizing that the redraw is at 18%.

Alas, little did they count on my Mustachian Powers.

Bicycle_B

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #12 on: May 07, 2018, 07:39:46 AM »
Those are good reasons business reasons for the lender to lend it, and implicitly good reasons why you can profit while others wouldn't.  But how did you get it?  (Who is the lender, and what does a person need to do in order to find a similar offer...if you don't mind sharing.) 

:)


AdrianC

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #13 on: May 07, 2018, 08:12:08 AM »
Would you allocate your funds into a Swensen portfolio if you came across a big chunk of money?
Probably not, because I wouldn't put that much into REITs.  But who knows what will be best in the future?  It's not an unreasonable portfolio.

IIRC, Swenson says to reduce the REIT component if you own real estate.

I liked the book. It's worth a read. I have a similar allocation minus the TIPs and REITs.

WalkaboutStache

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #14 on: May 07, 2018, 07:45:45 PM »
Those are good reasons business reasons for the lender to lend it, and implicitly good reasons why you can profit while others wouldn't.  But how did you get it?  (Who is the lender, and what does a person need to do in order to find a similar offer...if you don't mind sharing.) 

:)

The lender was HSBC.  I have had an account with them in Hong Kong since I moved here some 7 years ago.  I called to deal with something else, and they just offered it to me.

The HK Monetary Authority just tightened up the money supply to keep the HKD within its USD dollar-pegged range (right not it is at 7.85 HKD to 1 USD, the top of the range), so interest rates are at about 3%.  I feel like I made it in the nick of time.  If this is available again 5 years from now, I will probably get it again though I expect that by then my financial situation will be very different, salary-wise, so they may not be as interested in me.

Bicycle_B

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #15 on: May 07, 2018, 09:09:24 PM »
Thx, Walkabout. 

SeattleCPA

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #16 on: May 08, 2018, 11:03:35 AM »
OK, a reader in this thread suggested I point to this blog post:

100% stocks suffer from two weaknesses

The reasoning, I think, is that essentially I'm employing Swensen's allocation to create better outcomes than a 100% stocks portfolio and in process demonstrating why Swensen does what he does (adding REITs, folding in treasuries)

Not looking to start a fight here. But rather to show *how* you boost your return if you have investments that aren't correlated and *how* you can build a less risky portfolio but get just as good an overall portfolio return.
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AdrianC

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #17 on: May 08, 2018, 01:39:52 PM »
Not looking to start a fight here. But rather to show *how* you boost your return if you have investments that aren't correlated and *how* you can build a less risky portfolio but get just as good an overall portfolio return.

Trouble is, these examples are so date-dependent. For example using Portfolio Visualizer with VTI (stocks) and VNQ (Reits), 2004-2018 (data available from 2004 for VNQ), comparing 100% VTI, 100% VNQ, and a 50/50 combination: Using 100% VTI gives a better return, a lower standard deviation and a lower maximum draw down. In other words, combining these two assets made the portfolio worse over a 14 year time period.


SeattleCPA

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #18 on: May 08, 2018, 02:37:24 PM »
Not looking to start a fight here. But rather to show *how* you boost your return if you have investments that aren't correlated and *how* you can build a less risky portfolio but get just as good an overall portfolio return.

Trouble is, these examples are so date-dependent. For example using Portfolio Visualizer with VTI (stocks) and VNQ (Reits), 2004-2018 (data available from 2004 for VNQ), comparing 100% VTI, 100% VNQ, and a 50/50 combination: Using 100% VTI gives a better return, a lower standard deviation and a lower maximum draw down. In other words, combining these two assets made the portfolio worse over a 14 year time period.

This may be too subtle to make sense, but I do not think the actionable insights are to build portfolios that look like the examples I constructed.

Rather, I think the actionable insights are to combine less than perfectly correlated assets and then pick up a rebalancing bonus and also dial down variability of returns.

This further stipulation: You don't know for sure if this will work. And it won't work perfectly.

The only thing you can truly count on is this: If you don't combine less than correlated assets, you for sure get no rebalancing bonus, you for sure don't dial down your risk.



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Radagast

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #19 on: May 08, 2018, 10:41:38 PM »
Thanks, everyone.  I downloaded a sample of the book into my kindle, and found it underwhelming.  The rant against active fund managers is not new, so that was not interesting.  Spreading investments across global equity markets is already something I do (I am an expat), so that was good to hear but also no new insight.  I think I'll pass on reading it - there is more to be learned in these forums than in yet another book.
The thing I got most out of it was the discussion of bonds
-Why corporate bond holders will get screwed
-Municipal bonds holders will get almost as screwed (in a tight situation)
-Federal bond holders are in best shape, the federal government has the least incentive to screw its citizens
-There is even less skill among active bond market pickers/timers than there is among stock market pickers/timers, and the difference in outcomes of the bottom and top quartiles is much smaller, so don't bother trying. Find a profitable hobby instead.

AdrianC

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #20 on: May 10, 2018, 09:46:59 AM »
This may be too subtle to make sense, but I do not think the actionable insights are to build portfolios that look like the examples I constructed.

Rather, I think the actionable insights are to combine less than perfectly correlated assets and then pick up a rebalancing bonus and also dial down variability of returns.

I agree. And that would be great, however...

Quote
This further stipulation: You don't know for sure if this will work. And it won't work perfectly.

This. Plus, no one seems to be concerned about the timing of the rebalance. Why annual on January 1st? Is it because that's the data set available?

Regarding Reits, here's a recent Swedroe article:

http://www.etf.com/sections/index-investor-corner/swedroe-real-estate-isnt-special?nopaging=1

"For investors using asset classes to determine their allocation, the findings suggest that REITs should receive no more than a market-cap weighting."

SeattleCPA

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Re: Is anyone familiar with David Swensen’s ideas
« Reply #21 on: May 10, 2018, 03:11:37 PM »
This may be too subtle to make sense, but I do not think the actionable insights are to build portfolios that look like the examples I constructed.

Rather, I think the actionable insights are to combine less than perfectly correlated assets and then pick up a rebalancing bonus and also dial down variability of returns.

I agree. And that would be great, however...

Quote
This further stipulation: You don't know for sure if this will work. And it won't work perfectly.

This. Plus, no one seems to be concerned about the timing of the rebalance. Why annual on January 1st? Is it because that's the data set available?

Regarding Reits, here's a recent Swedroe article:

http://www.etf.com/sections/index-investor-corner/swedroe-real-estate-isnt-special?nopaging=1

"For investors using asset classes to determine their allocation, the findings suggest that REITs should receive no more than a market-cap weighting."

I'm not sure we disagree here. But I guess my point is, why not channel David Swensen and maybe pick up a rebalancing bonus (I think you probably will) and maybe dial down your portfolio variability (I am pretty sure you get this).

If you don't try this, you for sure don't get these benefits. If you do try, you may get the benefits some years.

I'm not sure of the exactly right analogy, but this all sort of strikes me as akin to getting more exercise or eating healthier so you can extend your life expectancy. You can't know for sure these will extend your life. But probably you're going to get some benefit. Not as much as you'd like of course. But some.

Again, I know that's not a good analogy.
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