1. Background and Philosophy
David Swensen, the Yale Endowment Manager, proposed this one size fit in all model portfolio for individual investors (see Unconventional Success: A Fundamental Approach to Personal Investment). 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. Swensen’s philosophy emphasizes:
- Diversification across uncorrelated asset classes to reduce risk.
- Equity-heavy allocation (70% stocks, 30% bonds) for long-term growth.
- Inflation protection via Treasury Inflation-Protected Securities (VIPSX) and real estate (VGSIX).
- Avoiding commodities, unlike other portfolios, as he believed TIPS and REITs suffice for inflation hedging.
Note: it has always been somewhat confusing whether Swensen advocated for long term treasury bonds or just 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, many interpreted that he meant to use long term treasury bonds. However, more recently, a reader posted a reply from Swensen himself on morningstar.com, which seems to indicate he was referring to average duration treasury bonds.
2. Asset Allocation Analysis
Allocation Breakdown:
- 30% VTSMX (U.S. Total Stock Market): Core U.S. equity exposure.
- 20% VGSIX (REITs): Real estate diversification and income.
- 20% VGTSX (International Stocks) or 15% VGTSX + 5% VEIEX (Emerging Markets): Global equity diversification.
- 15% VIPSX (TIPS): Inflation-protected bonds.
- 15% VUSTX (Long-Term Treasuries): Interest rate hedge and stability.
Key Advantages:
- Diversification: Covers U.S./international equities, real estate, and bonds with low correlation.
- Inflation Resilience: Heavy allocation to TIPS and REITs mitigates inflation risk.
- Simplicity: Only 5-6 funds needed for broad market exposure.
Potential Drawbacks:
- Higher volatility due to 70% equity allocation (may not suit conservative investors).
- No commodities, which could underperform during commodity bull markets.
- Interest rate risk from long-term Treasuries (VUSTX).
3. Practical Application in Retirement Accounts
The following shows how to apply Swensen lazy portfolio to retirement accounts,
For 401(k) Accounts:
Step 1: Match Available Funds
- U.S. Stocks: Look for a “Total Stock Market” or “S&P 500” fund (e.g., VFIAX).
- International Stocks: Use a “Total International Stock” fund or combine developed/emerging market funds.
- REITs: If unavailable, allocate to a broader “real estate” or “equity income” fund.
- Bonds: Substitute VIPSX with a “TIPS” or “inflation-protected” bond fund. Replace VUSTX with an “intermediate-term Treasury” fund if long-term bonds are unavailable.
Step 2: Adjust for Missing Asset Classes
- If REITs are unavailable, increase U.S. or international stock allocation.
- If TIPS are missing, use a general bond fund or increase Treasury allocation.
For IRA Accounts:
Investors can directly replicate the portfolio using the specified Vanguard funds or equivalent ETFs (e.g., VTI for VTSMX, VNQ for VGSIX).
Rebalancing Tip: Swensen recommended annual rebalancing to maintain target allocations. Some have suggested that more frequent adjustments, like quarterly rebalancing, might help reduce volatility a bit more. That could be true in theory. However, we still think annual rebalancing is probably the best approach, especially in the spirit of “laziness” (which, in investing, is often underrated). Less tinkering, fewer chances to outsmart yourself.