“Individual investors should take control of their financial destinies, educate themselves, avoid sales pitches and invest in a well-diversified portfolio of low-cost index funds, like those offered by Vanguard, which operates on a not-for-profit basis Such a strategy reduces the fees paid to the parasitic mutual fund industry, leaving more money in the hands of the investing public. ” The Mutual Fund Merry-Go-Round – NY Times , August 13, 2011 .
David Swensen, investment manager of the Yale University Endowment Fund, has addressed how investors should set up and manage their investments in his book, Unconventional Success: A Fundamental Approach to Personal Investment.
Swensen recommends that investors should select not for profit mutual fund companies (such as Vanguard or TIAA-CREF) to minimize investment expenses and largely eliminate conflicts of interest.
The Swensen portfolio consists of six core asset class allocations:
- US equity: 30%
- Foreign developed equity: 15%
- Emerging market equity: 10%
- US REITS: 15%
- US Treasury bonds: 15%
- US TIPS: 15%
Although the recommended portfolio splits its allocation with 70% equities/ 30% fixed income, the portfolio can be adjusted to reflect alternative equity/bond allocations.
In response to a query, Swensen indicates that the treasury bond duration should be set at the market duration (see David Swensen – US Treasury Bonds duration). This post will use an intermediate treasury fund as the vehicle for the bond allocation.
The charts below (click images to enlarge) show portfolio allocations.
Fund selections
The tables below show returns for the Swensen portfolios, using Vanguard investor shares for the asset class selections. The return series begins in 2001, when Vanguard initiated an inflation protected securities fund.
Investors with larger portfolios can cut expenses by using admiral shares. Investors with large treasury bond allocations might also consider substituting treasury bond ladders and treasury inflation protected bond ladders for the bond fund allocations.
The fund selections include:
Funds
| Asset class | Fund | Investor shares | Expense ratio | Admiral shares | Expense ratio |
|---|---|---|---|---|---|
| US equity | Total market index | VTSMX | 0.17% | VTSAX | 0.05% |
| Developed market equity | Developed market index | VDVIX | 0.20% | VTMGX | 0.09% |
| Emerging market equity | Emerging markets index | VEIEX | 0.33% | VEMAX | 0.15% |
| US real estate | REIT index | VGSIX | 0.24% | VGSLX | 0.10% |
| US treasury bond | Intermediate treasury fund | VFITX | 0.20% | VFIUX | 0.10% |
| US TIPs | Inflation protected securities fund | VIPSX | 0.20% | VAIPX | 0.10% |
Returns
The tables below give annual returns, compound returns, and standard deviations for the Swensen portfolios, using returns for Vanguard investor share fund selections. Keep in mind that past performance does not forecast future performance.
Annual returns
| Year | 70/30 | 60/40 | 40/60 | 20/80 |
|---|---|---|---|---|
| 2013 | 11.35% | 9.03% | 3.83% | -1.09% |
| 2012 | 13.57% | 12.30% | 9.78% | 7.25% |
| 2011 | 1.26% | 2.83% | 5.61% | 8.56% |
| 2010 | 14.57% | 13.42% | 11.21% | 8.98% |
| 2009 | 26.25% | 22.88% | 17.19% | 10.82% |
| 2008 | -26.57% | -21.94% | -12.98% | -3.87% |
| 2007 | 7.98% | 8.16% | 9.29% | 9.66% |
| 2006 | 17.33% | 15.07% | 10.69% | 6.24% |
| 2005 | 9.56% | 8.41% | 6.58% | 4.52% |
| 2004 | 15.77% | 14.31% | 11.53% | 8.68% |
| 2003 | 27.87% | 24.50% | 18.22% | 11.70% |
| 2002 | -4.20% | -1.44% | 4.21% | 9.80% |
| 2001 | -2.74% | -1.30% | 1.70% | 4.64% |
Compound returns
| Period | 70/30 | 60/40 | 40/60 | 20/80 |
|---|---|---|---|---|
| 3yr CAGR | 8.59% | 7.98% | 6.38% | 4.82% |
| 5yr CAGR | 13.11% | 11.90% | 9.41% | 6.82% |
| 10yr CAGR | 8.13% | 7.77% | 6.97% | 5.91% |
| 13yr CAGR | 7.64% | 7.50% | 7.16% | 6.54% |
Standard deviation
| Period | 70/30 | 60/40 | 40/60 | 20/80 |
|---|---|---|---|---|
| 3yr Stdev | 6.56% | 4.81% | 3.05% | 5.23% |
| 5yr Stdev | 8.92% | 7.30% | 5.19% | 4.65% |
| 10yr Stdev | 14.13% | 11.93% | 8.01% | 4.87% |
| 13yr Stdev | 14.33% | 12.01% | 7.84% | 4.63% |
See David Swensen portfolio , google drive spreadsheet for return computations.
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