David Swensen Insight

David Swensen revises asset allocation for individual investors

Posted on: March 25, 2009

In his book Unconventional Success: A Fundamental Approach to Personal Investment, Swensen recommends the following allocations, for individual investors who want a “well-diversified, equity-oriented portfolio”:

30% Domestic stock funds

20% Real estate investment trusts

15% U.S. Treasury bonds

15% U.S. Treasury inflation-protected securities

15% Foreign developed-market stock funds

5% Emerging-market stock funds

In an interview with Yale magazine, Swensen said, economic conditions might call for a modest revision. He now recommends that investors have 15 percent of their assets in real estate investment trusts, and raise their investment in emerging-market stock funds to 10 percent.

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The following illustrates an implementation of the Swensen allocation with a strong small and value tilt. Despite having only 70% in equity, it has outperformed the benchmark S&P 500.

icarra chart

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7 Responses to "David Swensen revises asset allocation for individual investors"

RE still a sound investment? in spite of the huge amount of debt coming due on commercial properties? Gotta make you wonder.

I think REITs are on shaky ground. However, it is not like there is any secret to it and the risk may have already been priced into their prices. David Swensen‘s revision points a direction of his thinking. I would go a little further than him, I would allocate 15% to emerging markets and 10% to RE.

Does his or the value investing approach take account of OTC derivatives and their associated and as yet unrealised losses

It is not despite only having 70% i equity that David has outperformed in the bear market, it is BECAUSE he only had 70% in equity he outperformed. See my point?

Good point.

What is the maximum draw down on the mz portfolio model. It appears commensurate with the S&P500

Somewhat less. However, it does not require any foresight. I don’t have a direct line from God, so i won’t tell my clients I can forecast the market better than anybody.

If a client want a more conservative portfolio, they can check out this 40/60 model: http://www.icarra.com/chartPortfolio.php?addCompare=10&id=7266

Though at times it was scary, but what’s common for all of my clients is they recovered all their losses within two years of the biggest market crash in the last 80 years. They did that with an imperfect advisor who can not forecast the market.

Michael

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm applying David Swensen's insights for clients. He is also a regular contributor to Morningstar Advisor. To use his wealth management services, schedule a discovery meeting (phone call) with him.

You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights.

@mzhuang

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