06/02/2011

Retirement investing is a long term process. This report reviews David Swensen Six ETF Asset Individual Investor Plan plan. We will discuss the investment choices and present the plan rating by MyPlanIQ. Current economic and market conditions are discussed in the context of the investment portfolios in the plan. We will then show how investors in David Swensen Six ETF Asset Individual Investor Plan can achieve reasonable investment results using asset allocation strategies.

Plan Review and Rating

David Swensen, the Yale Endowment Manager, proposed this one size fit in all model portfolio for individual investors. The major difference between this portfolio and other conventional portfolios is that it emphasizes international equities (including emerging market equities) as well as real estate investment. Compared with various diversified portfolios, an interesting asset class missing is the commodities, which has been considered to be an excellent anti-inflation diversifier.  This is complemented with its emphasis on the inflation-protected treasury bonds. We assume annual rebalance although Swensen actually pointed out that in Yale's institutional portfolio, they rebalanced daily, which, by his estimate, gave about 1-2% of excessive returns vs. annual rebalancing.

Compared with the Simpler Is Better (SIB) portfolios discussed in an article, one can see that Swensen's six assets exclude the commodities while putting emphasis on using fixed income for the purpose of inflation protection and hedging.

Note: it has been confusing whether Swensen advocated using long term treasury bonds or just an average duration treasury bonds. In his book Unconventional Success: A Fundamental Approach to Personal Investment, he wrote "The purity of noncallable, long-term, default-free Treasury bonds provides the most powerful diversification to investor portfolios".  Based on this sentence, it has been interpreted that he meant to use the long term treasury bond. However, recently, a reader posted a reply from David Swensen on this question in morningstar.com, which indicates the average duration of treasury bonds.

The portfolio consists of the following:

- 30% in Vanguard Total Stock Market Index (VTI)

- 20% in Vanguard REIT Index (VNQ)

- 20% in Vanguard Total International Stock (VEU) or (15% in VEU and 5% in VWO)

- 15% in Vanguard Inflation Protected Securities (TIP)

- 15% in Vanguard Long Term Treasury Index (TLT)

The above model portfolio should be compared with the moderate model portfolios in this ETF plan.

David Swensen Six ETF Asset Individual Investor Plan consists of 7 funds. These funds enable participants to gain exposure to 5 major assets: US Equity, Foreign Equity, REITs, Emerging Market Equity, Fixed Income.

As of Jun 1, 2011, this plan investment choice is rated as average based on MyPlanIQ Plan Rating methodology that measures the effectiveness of a plan's available investment funds. It has the following detailed ratings:

Diversification -- Rated as above average (80%) 
Fund Quality -- Rated as average (41%) 
Portfolio Building -- Rated as average (46%) 
Overall Rating: average (55%)

Current Economic and Market Conditions

As we are clearly entering a seasonally weak period for risk assets, global economies have clearly slowed down. Recently released Case-Shiller housing index showed that the U.S. is now in a double dip state for housing prices. Unemployment rate has been stuck at 9% level. Additional indicators such as conference board consumer confidence index and Chicago ISM index are all pointing to a slow down in the summer season.

Amid a string of bad economic news, risk assets have come down a bit, though they are still ranked high at the moment. Long term treasury bonds, however, have shot up in the anticipation of weakened economy. The following table shows the major asset class ranking in terms of their momentum.

Portfolio Discussions

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies. For comparison purpose, we also include the moderate model portfolios of a typical 5 asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent:

US Equity: SPY or VTI 
Foreign Equity: EFA or VEU 
Emerging Market Equity: EEM or VWO 
REITs: IYR or VNQ or ICF 
Fixed Income: AGG or BND 

Performance chart (as of Jun 1, 2011)

Performance table (as of Jun 1, 2011)

At the moment, the long term treasury bonds ETF TLT is held in both the tactical and strategic moderate portfolios. 

To summarize, investors adopting David Swensen Six ETF Asset Individual Investor Plan plan can achieve reasonable investment returns by adopting asset allocation strategies that are tailored to their risk profiles.

Exchange Tickers: (VTI), (VEU), (VNQ), (VWO), (TIP), (TLT), (CASH), (BND)

Symbols: VTI, VEU, VNQ, VWO, TIP, TLT, CASH, BND

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06/01/2011

This article is part of a series of case studies we are conducting for various 401K plans. In this article, we will discuss how participants in Apple 401K can achieve reasonable investment results using asset allocation strategies. We will also discuss how those portfolios are positioned in today’s market environment.

Apple Inc., (Ticker: AAPL) together with subsidiaries, designs, manufactures, and markets personal computers, mobile communication devices, and portable digital music and video players, as well as sells various related software, services, peripherals, and networking solutions. The company sells its products worldwide through its online stores, retail stores, direct sales force, third-party wholesalers, resellers, and value-added resellers. In addition, it sells various third-party Macintosh, iPhone, and iPod compatible products, including application software, printers, storage devices, speakers, headphones, and various other accessories and peripherals through its online and retail stores, and digital content and applications through the iTunes Store. The company sells its products to consumer, small and mid-sized business, education, enterprise, government, and creative customers. As of September 26, 2009, it had 273 retail stores, including 217 stores in the United States and 56 stores internationally. The company, formerly known as Apple Computer, Inc., was founded in 1976 and is headquartered in Cupertino, California.

Apple offers generous benefits to its employees. It was the first high tech company in Bay Area that offered free day care for employees' children.

Apple 401K's 401K plan consists of 14 funds. These funds enable participants to gain exposure to 4 major assets: US Equity, Foreign Equity, REITs, Fixed Income. Four Core Asset Index Funds REITs's 401K plan consists of funds. These funds enable participants to gain exposure to 4 major assets: US Equity, Foreign Equity, REITs, Fixed Income.

As of May 27, 2011, Apple 401K investment choice is rated as average and Four Core Asset Index Funds REITs investment choice is rated as based on MyPlanIQ Plan Rating methodology that was designed to measure how effective a plan's available investment funds are . It has the following detailed ratings:

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA , both provided by MyPlanIQ). For comparison purpose, we also include the moderate model portfolios of a typical 4 asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent:

US Equity: SPY or VTI
Foreign Equity: EFA or VEU
REITs: IYR or VNQ or ICF
Fixed Income: AGG or BND

Performance chart (as of May 27, 2011)

Performance table (as of May 27, 2011)

Currently are doing well. But these asset classes are not available to Apple 401K participants.

To summarize, Apple 401K plan participants can achieve reasonable investment returns by adopting asset allocation strategies that are tailored to their risk profiles. Currently, the tactical asset allocation strategy indicates overweighing on Foreign Equity, REITs and Fixed Income funds.


Disclosure:

MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Symbols:AAPL, CASH, VBMFX, LHYZX, FBAKX, FGRIX, FMGKX, VITPX, VITSX, NAESX, FCNTX, RGRYX, VGTSX, VDMIX, TAREX, VTSMX, VGSIX

Exchange Tickers: (AAPL), (CASH), (VBMFX), (LHYZX), (FBAKX), (FGRIX), (FMGKX), (VITPX), (VITSX), (NAESX), (FCNTX), (RGRYX), (VGTSX), (VDMIX), (TAREX), (VTSMX), (VGSIX)

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