Why the Yale Endowment Hate? [Request for portfolio help]

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bpp
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Re: Why the Yale Endowment Hate?

Post by bpp »

cj2018 wrote: Thu Aug 16, 2018 6:15 pm
bpp wrote: Thu Aug 16, 2018 5:37 pm
From the above article, it appears MIT trounced everyone else for the ten years ended March 2018. What was their portfolio?
I know, in fiscal year 2016, its investment breakdown is roughly the following:
  • Cash: 5.66%
  • US Treasury: 5.36%
  • US Government agency: 1.02%
  • Domestic bonds: 2.55%
  • Foreign bonds: 0.41%
  • Equity: 60.77% (HF =18.00%, US = 15.47%, International = 34.90%, PE = 31.62%)
  • Real estate: 20.14%
  • Real assets: 4.10%
In terms of its investment strategy, i will quote directly from its treasury report:
MIT’s investment policy is based on the primary goal of generating high real rates of return without exceptional volatility. To
reduce volatility, the portfolio is broadly diversified. To generate high real rates of return, MIT’s investment policy favors
equity investments over fixed income instruments and is heavily weighted toward less efficient markets such as private equity, real
estate, and real assets. MIT primarily invests through external fund managers, thereby allowing MIT to access the best investment talent globally
Source: http://vpf.mit.edu/sites/default/files/ ... rt2016.pdf

It's interesting to see some of their actual annualized return numbers - thanks for sharing
Image
Thanks for digging that up.

So, low in bonds, high in private equity. Not really suitable, or implementable, for an individual retail investor, it seems.
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Re: Why the Yale Endowment Hate?

Post by AlphaLess »

mbenoit116 wrote: Thu Aug 16, 2018 9:04 am Why the Yale Endowment Hate?
Your words, not ours.
I don't carry a signature because people are easily offended.
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Re: Why the Yale Endowment Hate?

Post by Buysider »

Inside story here, most endowment managers are very performance oriented only relative to their peers institutions. Several times a year, most of the CIOs from the top endowments and foundations gather and meet, to ensure everyone's portfolios are somewhat identical (and to complain that CIO pay is too low). Like the Japanese proverb, the nail that sticks out shall be hammered down", most endowments strive to be like their peers, with small differences along the margin.

I wish I was joking, but since I've been in this industry, pay has gone up exponential at most of the top endowments, and performance hasn't materially changed. Some schools manage to do the same as everyone else with a staff of 30 and a million dollar per year CIO, others manage with a staff of two and an investment committee following Bogle's ideas.
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Re: Why the Yale Endowment Hate?

Post by abuss368 »

AlohaJoe wrote: Thu Aug 16, 2018 8:48 pm
mbenoit116 wrote: Thu Aug 16, 2018 9:04 am I've been hearing index investors lambasting the Yale model recently. Where is this coming from? It's my understanding that the Yale model is a respected allocation for index investors. Is this allocation no longer any good?
Bogleheads argue with the Yale model because David Swensen and Warren Buffett recently had a high profile spat. (Well, high profile as far as these things go, your average person never heard a word about it, I'm sure.)

Buffett wrote something like "universities are all dumb and should just put their money in the S&P 500 instead of using high-fee advisors". Swensen wrote a reply saying "we make way more money than the S&P 500 and so do all of the other non-stupid universities".

Swensen takes a decidedly non-Boglehead stance that advisors can provide alpha and that fees aren't that important because total return is what matters, not your fees. Of course, Swensen is really talking about things in the context of institutional investing, not individual investing, because he means something like "if you have staff who have enough experience and time to deeply research advisors then you can pick the good ones and non-institutions don't have that ability".

Swensen is also very pro "alternative investments", which Bogleheads are in general very suspicious of. Yale's investment is something 1/3 private equity, which virtually no Boglehead would endorse for a personal portfolio.

Here are a few links:

https://portfoliocharts.com/2018/04/16/ ... tt-debate/
https://www.washingtonpost.com/news/won ... e5391c25bd

I'm sure you can find more if you Google "swensen buffett"
Interesting. I do not believe I heard about that flare up!
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Re: Why the Yale Endowment Hate?

Post by abuss368 »

As an alternative you could consider the Three Fund Portfolio or the Core-4 for simplicity and effectiveness.
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Re: Why the Yale Endowment Hate?

Post by staythecourse »

Buysider wrote: Fri Aug 17, 2018 7:53 am Inside story here, most endowment managers are very performance oriented only relative to their peers institutions. Several times a year, most of the CIOs from the top endowments and foundations gather and meet, to ensure everyone's portfolios are somewhat identical (and to complain that CIO pay is too low). Like the Japanese proverb, the nail that sticks out shall be hammered down", most endowments strive to be like their peers, with small differences along the margin.

I wish I was joking, but since I've been in this industry, pay has gone up exponential at most of the top endowments, and performance hasn't materially changed. Some schools manage to do the same as everyone else with a staff of 30 and a million dollar per year CIO, others manage with a staff of two and an investment committee following Bogle's ideas.
Interesting. The use of PE and real estate as a large component these folk's asset allocation would make it seem hard to be close to each other in terms of return (Guessing active management has a wide dispersion of returns). Also interesting is the focus on short term returns. Does show a alignment of interest difference (channeling Mr. Swensen here). If the endowments care about short and very long term returns and the CIO mostly cares about short term returns that is going to cause some alignment of interest difference.

The question I have is why folks who are so intelligent to be their bosses don't go, "Hey your returns are not better then they were when you had 1/2 the budget as you do now. Whats the deal?". Just shows even intelligent folks can be duped when it comes to finance.

Good luck.
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Re: Why the Yale Endowment Hate?

Post by TN_Boy »

abuss368 wrote: Fri Aug 17, 2018 8:50 am
AlohaJoe wrote: Thu Aug 16, 2018 8:48 pm
mbenoit116 wrote: Thu Aug 16, 2018 9:04 am I've been hearing index investors lambasting the Yale model recently. Where is this coming from? It's my understanding that the Yale model is a respected allocation for index investors. Is this allocation no longer any good?
Bogleheads argue with the Yale model because David Swensen and Warren Buffett recently had a high profile spat. (Well, high profile as far as these things go, your average person never heard a word about it, I'm sure.)

Buffett wrote something like "universities are all dumb and should just put their money in the S&P 500 instead of using high-fee advisors". Swensen wrote a reply saying "we make way more money than the S&P 500 and so do all of the other non-stupid universities".

Swensen takes a decidedly non-Boglehead stance that advisors can provide alpha and that fees aren't that important because total return is what matters, not your fees. Of course, Swensen is really talking about things in the context of institutional investing, not individual investing, because he means something like "if you have staff who have enough experience and time to deeply research advisors then you can pick the good ones and non-institutions don't have that ability".

Swensen is also very pro "alternative investments", which Bogleheads are in general very suspicious of. Yale's investment is something 1/3 private equity, which virtually no Boglehead would endorse for a personal portfolio.

Here are a few links:

https://portfoliocharts.com/2018/04/16/ ... tt-debate/
https://www.washingtonpost.com/news/won ... e5391c25bd

I'm sure you can find more if you Google "swensen buffett"
Interesting. I do not believe I heard about that flare up!
To expand a bit on the above post and what Tyler9000 said, Swensen wrote a book, "Pioneering Portfolio Management" aimed primarily at institutional investors (first edition in 2000 or so). He analyzes a number of traditional and non-traditional asset classes. Yale uses active management. It uses non-traditional asset classes like timberland (as in, owning the timberland directly) and private equity. He talks, as I recall, about how you can get better returns from non-liquid investments, if you can deal with the lack of liquidity. They continuously re-balance I think, as in daily. Their portfolio is surely unlikely anything you are likely to see recommended on this board. You can hunt down the Yale portfolio reports which includes their asset allocation for a given year on the web. For a long time, their performance was outstanding -- I don't know how the last few years have gone. They were crushing traditional asset allocations for a long time, so even if they've lagged recently, they still probably look good over the long haul.

But Swensen later wrote another book, "Unconventional Success," for the individual investor. And with regards to the strategies described in "Pioneering Portfolio Management," he says, in so many words, don't try it. His viewpoint is that only larger sophisticated organizations have any chance of identifying and using the top level talent required to make the strategies* used by Yale viable. He recommends a diversified, indexed portfolio, similar to what the OP is talking about. His recommendation for a relatively large REIT percentage is a bit controversial - I don't know if he has backed off from that. He is a strong fan of treasuries for your bond allocation, disliking corporate bonds. Anyway, his recommendations for the individual investor are pretty mainstream (among the indexing crowd) I think.

*Swensen's support of and belief in active management, at least in some circumstances, is an area where most on this forum would disagree with him. But he strongly recommends indexing for individual investors; for that matter, he doesn't think smaller institutions and organizations should try what Yale does either.
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Re: Why the Yale Endowment Hate?

Post by abuss368 »

TN_Boy wrote: Fri Aug 17, 2018 1:05 pm
abuss368 wrote: Fri Aug 17, 2018 8:50 am
AlohaJoe wrote: Thu Aug 16, 2018 8:48 pm
mbenoit116 wrote: Thu Aug 16, 2018 9:04 am I've been hearing index investors lambasting the Yale model recently. Where is this coming from? It's my understanding that the Yale model is a respected allocation for index investors. Is this allocation no longer any good?
Bogleheads argue with the Yale model because David Swensen and Warren Buffett recently had a high profile spat. (Well, high profile as far as these things go, your average person never heard a word about it, I'm sure.)

Buffett wrote something like "universities are all dumb and should just put their money in the S&P 500 instead of using high-fee advisors". Swensen wrote a reply saying "we make way more money than the S&P 500 and so do all of the other non-stupid universities".

Swensen takes a decidedly non-Boglehead stance that advisors can provide alpha and that fees aren't that important because total return is what matters, not your fees. Of course, Swensen is really talking about things in the context of institutional investing, not individual investing, because he means something like "if you have staff who have enough experience and time to deeply research advisors then you can pick the good ones and non-institutions don't have that ability".

Swensen is also very pro "alternative investments", which Bogleheads are in general very suspicious of. Yale's investment is something 1/3 private equity, which virtually no Boglehead would endorse for a personal portfolio.

Here are a few links:

https://portfoliocharts.com/2018/04/16/ ... tt-debate/
https://www.washingtonpost.com/news/won ... e5391c25bd

I'm sure you can find more if you Google "swensen buffett"
Interesting. I do not believe I heard about that flare up!
To expand a bit on the above post and what Tyler9000 said, Swensen wrote a book, "Pioneering Portfolio Management" aimed primarily at institutional investors (first edition in 2000 or so). He analyzes a number of traditional and non-traditional asset classes. Yale uses active management. It uses non-traditional asset classes like timberland (as in, owning the timberland directly) and private equity. He talks, as I recall, about how you can get better returns from non-liquid investments, if you can deal with the lack of liquidity. They continuously re-balance I think, as in daily. Their portfolio is surely unlikely anything you are likely to see recommended on this board. You can hunt down the Yale portfolio reports which includes their asset allocation for a given year on the web. For a long time, their performance was outstanding -- I don't know how the last few years have gone. They were crushing traditional asset allocations for a long time, so even if they've lagged recently, they still probably look good over the long haul.

But Swensen later wrote another book, "Unconventional Success," for the individual investor. And with regards to the strategies described in "Pioneering Portfolio Management," he says, in so many words, don't try it. His viewpoint is that only larger sophisticated organizations have any chance of identifying and using the top level talent required to make the strategies* used by Yale viable. He recommends a diversified, indexed portfolio, similar to what the OP is talking about. His recommendation for a relatively large REIT percentage is a bit controversial - I don't know if he has backed off from that. He is a strong fan of treasuries for your bond allocation, disliking corporate bonds. Anyway, his recommendations for the individual investor are pretty mainstream (among the indexing crowd) I think.

*Swensen's support of and belief in active management, at least in some circumstances, is an area where most on this forum would disagree with him. But he strongly recommends indexing for individual investors; for that matter, he doesn't think smaller institutions and organizations should try what Yale does either.
Thanks! I am very familiar with David Swensen and his books as I attended a lecture of his. In fact I wrote an extensive summary of the event on the forum. Someone recently reactivated it if your interested.
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Re: Why the Yale Endowment Hate?

Post by mbenoit116 »

Angst wrote: Thu Aug 16, 2018 10:51 am
mbenoit116 wrote: Thu Aug 16, 2018 9:04 am[Snip...]

I've been hearing index investors lambasting the Yale model recently. Where is this coming from? It's my understanding that the Yale model is a respected allocation for index investors. Is this allocation no longer any good?
You're new to the website; 1 post so far, no reply from you to the responses you've received from others. You need to explain the above statement, otherwise your post is just trolling. Please clarify your original post.
I was referring to articles like this:
https://www.marketwatch.com/story/a-les ... 2017-02-06
https://seekingalpha.com/article/413295 ... ale?page=2

In the future, please don't jump on me for failing to respond to an initial post less than 2 hours after it's been posted.
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Re: Why the Yale Endowment Hate?

Post by mbenoit116 »

retiredjg wrote: Thu Aug 16, 2018 5:07 pm Choking on all the ivy here.... :shock:


Let's talk about the retirement portfolio. You have posted what you have in Roth IRA. That should not the same thing as what is in your portfolio. And it is what is in the portfolio that matters, not one account in a portfolio.

I don't think there is a lot of hate for the Yale endowment here. But an endowment is not a retirement portfolio. What is appropriate for an endowment may be different from what is appropriate for a retirement portfolio. For example, long term bonds make good sense in a very long term endowment portfolio. Not so much for a retirement portfolio.

For a portfolio, I think an extra 20% devoted to REIT is probably too much and I don't even think Swenson advocates for that number any more. For a portfolio, I'd cut that back to an extra 10% or less.

What is it that you really want to know?
My IRA is my only investment, so it's currently my entire portfolio. Since I have a 30-40 year time horizon, I decreased the percent allocated to bonds.

I think my confusion comes from not realizing the difference between the Yale endowment and the recommendations that Swensen made in "Unconventional Success," which is the source that I am referring to.

Other than overweighting in REITs (which I may now change), it seems like my portfolio is pretty orthodox.

To answer another poster's query, I guess my bottomline question is: is this a good portfolio, should I tweak it, or change it entirely to something like a 3 fund portfolio?
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Re: Why the Yale Endowment Hate?

Post by mbenoit116 »

LadyGeek wrote: Thu Aug 16, 2018 7:24 pm mbenoit116, Welcome! Here are some helpful posts.
mbenoit116 wrote: Thu Aug 16, 2018 9:04 am I'm a 29 year old investor with some knowledge of index investing. In my Roth IRA, I have the following allocation, which is the Yale Endowment model with a small-cap value tilt:

Total Market 35.0%
Real Estate 20.0%
Small Cap Value 10.0%
International Dev. 15.0%
Emerging Markets 5.0%
TIPS 7.5%
Long-term Treasuries 7.5%

I've been hearing index investors lambasting the Yale model recently. Where is this coming from? It's my understanding that the Yale model is a respected allocation for index investors. Is this allocation no longer any good?
pkcrafter wrote: Thu Aug 16, 2018 10:17 am The portfolio you posted is David Swensen's version of the endowment portfolio for retail investors. Small value and REIT are pretty common additions to the 3-fund. The long term bonds are OK in an endowment, but they won't reduce volatility in an individual investor's portfolio. Replace long term bond with total bond and you've got a moderate slice/dice Boglehead portfolio.

Paul
nedsaid wrote: Thu Aug 16, 2018 12:09 pm
Nate79 wrote: Thu Aug 16, 2018 12:05 pm Do not confuse the Yale Endowment with the Yale Endowment portfolio that you mention in the OP. Not the same thing.
That is correct. Swenson has a portfolio that he recommends for individuals, which of course is different than the actual Yale Endowment portfolio. The thing is, he got his fame from the actual Yale Endowment. REITs have fallen out of favor here, lots of Bogleheads, including me would have a hard time putting 20% of a portfolio into REITs. I would recommend more like 10% for those who really want REITs. I still like them but less than I used to. Valuations are a big factor.
triceratop wrote: Thu Aug 16, 2018 12:10 pm OP, where did you read this? Can you provide more context so those replying can deal with any possible criticism more substantively?...
retiredjg wrote: Thu Aug 16, 2018 5:07 pm Choking on all the ivy here.... :shock:

Let's talk about the retirement portfolio. You have posted what you have in Roth IRA. That should not the same thing as what is in your portfolio. And it is what is in the portfolio that matters, not one account in a portfolio.

I don't think there is a lot of hate for the Yale endowment here. But an endowment is not a retirement portfolio. What is appropriate for an endowment may be different from what is appropriate for a retirement portfolio. For example, long term bonds make good sense in a very long term endowment portfolio. Not so much for a retirement portfolio.

For a portfolio, I think an extra 20% devoted to REIT is probably too much and I don't even think Swenson advocates for that number any more. For a portfolio, I'd cut that back to an extra 10% or less.

What is it that you really want to know?
For our experienced members, please stay focused on helping the OP with the portfolio.
Thank you for collecting all of these! :sharebeer
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Re: Why the Yale Endowment Hate?

Post by LadyGeek »

^^^ You're welcome.
mbenoit116 wrote: Fri Aug 17, 2018 2:15 pm To answer another poster's query, I guess my bottomline question is: is this a good portfolio, should I tweak it, or change it entirely to something like a 3 fund portfolio?
Our "standard" recommendation would be to go with the Three-fund portfolio.

Since this is a tax-deferred account (Roth IRA), there are no capital gains taxes when shares are sold. So, you can change funds as many times as you want without penalty. (This is not the case for a taxable account.)
mbenoit116 wrote: Fri Aug 17, 2018 2:15 pm My IRA is my only investment, so it's currently my entire portfolio. Since I have a 30-40 year time horizon, I decreased the percent allocated to bonds.
OK, this information is helpful and a good start. There are a few things missing (like - do you have an Emergency fund?). Could you please complete the picture by posting what you have in this thread using the Asking Portfolio Questions format? It will make you think about the "big picture" while giving us the information we need to point you in the right direction.

If you have any questions, ask them here.
mbenoit116 wrote: Fri Aug 17, 2018 2:05 pm In the future, please don't jump on me for failing to respond to an initial post less than 2 hours after it's been posted.
I would agree. :wink:

To our experienced members: Consider the US spans 7 time zones (including Hawaii) and this forum reaches world-wide. Please allow a day or so for everyone to catch up.
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Re: Why the Yale Endowment Hate?

Post by mbenoit116 »

My goal is to determine if my our retirement portfolios are appropriate for me and for my wife. We also have $200k in a trust (discussed at bottom) that we are open to suggestions on.


Emergency funds: We have six+ months of expenses.
Debt: No debt, other than credit cards that we pay off monthly.
Tax Filing Status: Married
Tax Rate: 22% federal, 0% state
State of Residence: Texas
Age: 29
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 20%

My Roth IRA: $67K – modification of David Swensen’s recommended model

Total Market 35.0%
Real Estate 20.0%
Small Cap Value 10.0%
International Dev. 15.0%
Emerging Markets 5.0%
TIPS 7.5%
Long-term Treasuries 7.5%

My HSA at Fidelity (earmarked and allocated for use in retirement): $6.7K – David Swensen’s recommended model

Total Market 30.0%
Real Estate 20.0%
International Dev. 15.0%
Emerging Markets 5.0%
TIPS 15.0%
Long-term Treasuries 15.0%

Wife’s IRA: $40K

Fidelity Four-in-one Index Fund (FFNOX): 100%
- Large cap: 48%
- Extended market: 12%
- International equity: 25%
- US Bonds: 15%

Wife’s HSA at MassMutual: $8.7K (also earmarked for use in retirement)

American Funds 2050 Target Date Retirement fund (AALTX): 100%

Annual Contributions

$5,500 his Roth IRA
$5,500 her Roth IRA
$3,450 her HSA

I am an MBA student and do not have a job.
Her employer does not match contributions to her 401(k), so we contribute to IRAs instead. She does have a Roth 401(k) option.

We also have $200k in a trust account in my name that is in cash. Our plan is to get a head start and put $100k into a 529 to save for our future children’s college. $50k will go into a 6 or 12 month CD until we buy a starter home within the next year. Once we move out of this house, we want to rent it. Therefore, we’re planning to invest the remaining $50K in a 3 to 5 year CD, or a 20/80 index portfolio. to buy a second home in 4 to 5 years. Open to suggestions here.

We have a total of about $30k in cash in taxable accounts that we do not plan to invest.
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Re: Why the Yale Endowment Hate?

Post by retiredjg »

Is your portfolio actually at 80/20?

In order to determine that, someone would have to do the math on every fund you have. In other words, the way to understand a portfolio is to present every holding as a percentage of the entire portfolio, not as a percentage of the account the fund is in. If you look at a holding as a percentage of the portfolio, you know what you actually have.

Do you know how to do that or is that something you need help with?

As a general comment, there is no need to have every fund you want in every account. It causes unneeded complexity and often raises costs. However, some people like to do it that way. Sometimes, that is impossible because not every fund is available in every account or just costs more.

20% in real estate is pretty darn high. Nobody, not even Swenson as I recall, recommends that these days.

Most folks here would not recommend TIPS and long term treasuries, but it is not a fatal flaw.
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Yale vs. Three-Fund

Post by Taylor Larimore »

abuss368 wrote: Fri Aug 17, 2018 8:52 am As an alternative you could consider the Three Fund Portfolio or the Core-4 for simplicity and effectiveness.
abuss368:

Your "alternative" Second Grader Three Fund Portfolio would have been a good choice:

MarketWatch has a long-running contest between eight "Lazy Portfolios." The Three-Fund Portfolio currently leads Yale U's Unconventional Portfolio for 1-year, 3-year, 5-year and 10-year returns.

Total Returns For Eight Lazy Portfolios

Best wishes.
Taylor
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Re: Yale vs. Three-Fund

Post by JBTX »

Taylor Larimore wrote: Sat Aug 18, 2018 5:34 pm
abuss368 wrote: Fri Aug 17, 2018 8:52 am As an alternative you could consider the Three Fund Portfolio or the Core-4 for simplicity and effectiveness.
abuss368:

Your "alternative" Second Grader Three Fund Portfolio would have been a good choice:

MarketWatch has a long-running contest between eight "Lazy Portfolios." The Three-Fund Portfolio currently leads Yale U's Unconventional Portfolio for 1-year, 3-year, 5-year and 10-year returns.

Total Returns For Eight Lazy Portfolios

Best wishes.
Taylor
Because the three fund is heavily large cap weighted and large cap has had a good 10 year run. S&P500 blows them all away. It doesn't mean it is best for the long run.
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Re: Yale vs. Three-Fund

Post by abuss368 »

Taylor Larimore wrote: Sat Aug 18, 2018 5:34 pm
abuss368 wrote: Fri Aug 17, 2018 8:52 am As an alternative you could consider the Three Fund Portfolio or the Core-4 for simplicity and effectiveness.
abuss368:

Your "alternative" Second Grader Three Fund Portfolio would have been a good choice:

MarketWatch has a long-running contest between eight "Lazy Portfolios." The Three-Fund Portfolio currently leads Yale U's Unconventional Portfolio for 1-year, 3-year, 5-year and 10-year returns.

Total Returns For Eight Lazy Portfolios

Best wishes.
Taylor
Hi Taylor -

I agreed. The beauty of the Three Fund Portfolio is that is not only simple but quite a sophisticated investment portfolio. I am amazed that this simple and effective portfolio has outperformed not only Yale University but is leading the pack!

Best.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Why the Yale Endowment Hate?

Post by LadyGeek »

mbenoit116 wrote: Sat Aug 18, 2018 4:49 pm ...We also have $200k in a trust account in my name that is in cash. Our plan is to get a head start and put $100k into a 529 to save for our future children’s college. $50k will go into a 6 or 12 month CD until we buy a starter home within the next year. Once we move out of this house, we want to rent it. Therefore, we’re planning to invest the remaining $50K in a 3 to 5 year CD, or a 20/80 index portfolio. to buy a second home in 4 to 5 years. Open to suggestions here.

We have a total of about $30k in cash in taxable accounts that we do not plan to invest.
Hang on, do you have any experience in renting real estate? That's a full-time job, not to mention the added stress of dealing with tenants and a more complicate tax return. There is no guarantee on what will happen with your property. Unless you've actually done this before, don't count on rental income for retirement planning.

As they say... "You can borrow for education, but you can't borrow for retirement". You have the best of intentions, but are assuming that life goes as planned. That never happens. Your planned family can always get a loan to fund their education. If you invest all of that money now, you have zero money for retirement.

How does your plan look if you don't start putting money into a 529 plan until your kid(s) are 5 years old? The picture changes dramatically. Some food for thought.

(I retitled the thread and updated the first post to point to the portfolio info.)
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Re: Why the Yale Endowment Hate?

Post by Valuethinker »

retiredjg wrote: Sat Aug 18, 2018 5:17 pm
20% in real estate is pretty darn high. Nobody, not even Swenson as I recall, recommends that these days.
We debate that, interminably. Let's say there is no obvious case that US commercial RE is undervalued-- a strong contrast to the late 1990s/ early 2000s when the yields on REITs were much higher and ditto the discounts to NAV. There is at least some correlation with one's housing wealth.

RE offers theoretically greater correlation with inflation than stocks or bonds (except TIPS). That is its main virtue.

This much REITs will add volatility to the portfolio. I would suggest most investors are better off with 10% (or even 15%) than 20%.
Most folks here would not recommend TIPS and long term treasuries, but it is not a fatal flaw.
The argument Swensen makes is that if there is deflation, then LT Treasuries are better than IT or ST Treasuries - think Japan like conditions. And if there is inflation, TIPS are good.

This portfolio will be more volatile than one which is 15% IT US Treasuries, say, but given we are only talking 15% of portfolio, there is not much in it.
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Re: Why the Yale Endowment Hate?

Post by nisiprius »

Valuethinker wrote: Sun Aug 19, 2018 8:42 am The argument Swensen makes is that if there is deflation, then LT Treasuries are better than IT or ST Treasuries - think Japan like conditions.
I haven't read Swensen's book and I probably should, but I continue to be completely, utterly, totally mystified as to why anyone with positive net worth thinks they need protection against deflation. I've heard people use the phrase "protection against deflation" and I've never heard them explain what it means. It sounds to me like "I need protection against getting hurt by bags of money falling out of the sky."

Why would I care about deflation? I'm a net creditor, deflation is good for me, bring it on. (No, not really, because it goes with national economic misery that would hurt me in other ways).

Deflation is an obvious problem for debtors with fixed-rate debt, trying to pay it off with dollars that are harder and harder to earn. But if you're a debtor, you don't have money to invest in Treasuries of any term, do you?

Is this some competive-investing thing in which you would do fine in deflation anyway, but you want to beat all the other people who are also doing fine?
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Re: Why the Yale Endowment Hate?

Post by nedsaid »

nisiprius wrote: Sun Aug 19, 2018 9:03 am
Valuethinker wrote: Sun Aug 19, 2018 8:42 am The argument Swensen makes is that if there is deflation, then LT Treasuries are better than IT or ST Treasuries - think Japan like conditions.
I haven't read Swensen's book and I probably should, but I continue to be completely, utterly, totally mystified as to why anyone with positive net worth thinks they need protection against deflation. I've heard people use the phrase "protection against deflation" and I've never heard them explain what it means. It sounds to me like "I need protection against getting hurt by bags of money falling out of the sky."

Why would I care about deflation? I'm a net creditor, deflation is good for me, bring it on. (No, not really, because it goes with national economic misery that would hurt me in other ways).

Deflation is an obvious problem for debtors with fixed-rate debt, trying to pay it off with dollars that are harder and harder to earn. But if you're a debtor, you don't have money to invest in Treasuries of any term, do you?

Is this some competive-investing thing in which you would do fine in deflation anyway, but you want to beat all the other people who are also doing fine?
Deflation can be really bad for stocks and for bonds that are not investment grade. Also higher levels of unemployment often accompanies deflation. In our economy, debt is money, when a lot of debt is destroyed in an economic crisis through default you have an accompanying drop in the money supply. Lending also drops. Such things cause deflationary pressures. During the last financial crisis and its aftermath, the economy experienced whiffs of deflation though nothing sustained.
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Re: Why the Yale Endowment Hate?

Post by Valuethinker »

nisiprius wrote: Sun Aug 19, 2018 9:03 am
Valuethinker wrote: Sun Aug 19, 2018 8:42 am The argument Swensen makes is that if there is deflation, then LT Treasuries are better than IT or ST Treasuries - think Japan like conditions.
I haven't read Swensen's book and I probably should, but I continue to be completely, utterly, totally mystified as to why anyone with positive net worth thinks they need protection against deflation. I've heard people use the phrase "protection against deflation" and I've never heard them explain what it means. It sounds to me like "I need protection against getting hurt by bags of money falling out of the sky."

Why would I care about deflation? I'm a net creditor, deflation is good for me, bring it on. (No, not really, because it goes with national economic misery that would hurt me in other ways).

Deflation is an obvious problem for debtors with fixed-rate debt, trying to pay it off with dollars that are harder and harder to earn. But if you're a debtor, you don't have money to invest in Treasuries of any term, do you?
Most people have mortgages, at least, as well as an investment portfolio. At least until your early 50s, say.

Home equity falls with deflation, as well. Based on the Japan case, it falls a lot more than CPI inflation.

Equities also are likely to fall with deflation. For various reasons inflation increases corporate profits, and deflation reduces it.
Is this some competive-investing thing in which you would do fine in deflation anyway, but you want to beat all the other people who are also doing fine?
In the context of an entire portfolio, some deflation protection is not a bad thing. Assuming you have a bond-equity possibly REIT mix, at least.
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Re: Why the Yale Endowment Hate?

Post by cj2018 »

bpp wrote: Thu Aug 16, 2018 10:29 pm
cj2018 wrote: Thu Aug 16, 2018 6:15 pm
bpp wrote: Thu Aug 16, 2018 5:37 pm
From the above article, it appears MIT trounced everyone else for the ten years ended March 2018. What was their portfolio?
I know, in fiscal year 2016, its investment breakdown is roughly the following:
  • Cash: 5.66%
  • US Treasury: 5.36%
  • US Government agency: 1.02%
  • Domestic bonds: 2.55%
  • Foreign bonds: 0.41%
  • Equity: 60.77% (HF =18.00%, US = 15.47%, International = 34.90%, PE = 31.62%)
  • Real estate: 20.14%
  • Real assets: 4.10%
In terms of its investment strategy, i will quote directly from its treasury report:
MIT’s investment policy is based on the primary goal of generating high real rates of return without exceptional volatility. To
reduce volatility, the portfolio is broadly diversified. To generate high real rates of return, MIT’s investment policy favors
equity investments over fixed income instruments and is heavily weighted toward less efficient markets such as private equity, real
estate, and real assets. MIT primarily invests through external fund managers, thereby allowing MIT to access the best investment talent globally
Source: http://vpf.mit.edu/sites/default/files/ ... rt2016.pdf

It's interesting to see some of their actual annualized return numbers - thanks for sharing
Image
Thanks for digging that up.

So, low in bonds, high in private equity. Not really suitable, or implementable, for an individual retail investor, it seems.
Yup, individual investors are better off with the simple 3-fund portfolio. Endowment is playing a different game and therefore folks shouldn't replicate its AA.
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Re: Why the Yale Endowment Hate?

Post by iceport »

retiredjg wrote: Sat Aug 18, 2018 5:17 pm 20% in real estate is pretty darn high. Nobody, not even Swenson as I recall, recommends that these days.
Well, yes and no. Yes, he suggested revisions in interviews and at least one presentation that would boost the published model portfolio EM allocation by 5% of the portfolio and trim the REIT allocation by 5%. Which one of those was more important to Swensen remains a mystery to me. Also, IIRC poster abuss368 has reported back when he attended a gathering with Swensen that he still stands by his original model portfolio (possibly in addition to the revised version, I suppose).
retiredjg wrote: Sat Aug 18, 2018 5:17 pm Most folks here would not recommend TIPS...
Is this really true? :shock: I guess I haven't been paying attention!

I realize that in the interest of simplicity and broad applicability the forum recommendations most often default to some version of a three (or so) fund portfolio founded upon broad market index funds. On the bond side, that consists of some version of a total bond market index fund, when available. This all seems wise to me.

However, for many years it was also nearly as common to see recommendations for splitting the bond allocation 50/50 with TIPS. I guess you're right, I haven't seen that recommendation for quite some time. The question is why not?

What has changed? Do we have some new information that wasn't available before? What have we learned about TIPS that would cause a common 50% TIPS recommendation to be revised to 0%?

In my own portfolio I opted to diversify the bond portion with a TIPS allocation of 33% of fixed income, split with a total bond market index fund and a high yield stable value fund. Aside from my increased stable value fund allocation entering retirement, I've seen no reason to decrease the TIPS allocation.

What are others seeing now about TIPS that I'm missing — and that, apparently, they too were missing before?
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
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Re: Why the Yale Endowment Hate?

Post by mbenoit116 »

retiredjg wrote: Sat Aug 18, 2018 5:17 pm Is your portfolio actually at 80/20?

In order to determine that, someone would have to do the math on every fund you have. In other words, the way to understand a portfolio is to present every holding as a percentage of the entire portfolio, not as a percentage of the account the fund is in. If you look at a holding as a percentage of the portfolio, you know what you actually have.

Do you know how to do that or is that something you need help with?

As a general comment, there is no need to have every fund you want in every account. It causes unneeded complexity and often raises costs. However, some people like to do it that way. Sometimes, that is impossible because not every fund is available in every account or just costs more.

20% in real estate is pretty darn high. Nobody, not even Swenson as I recall, recommends that these days.

Most folks here would not recommend TIPS and long term treasuries, but it is not a fatal flaw.
All of our investments are in index funds, so it wouldn't be hard to run the calculations. I suppose I might save a little bit of money by not having every fund in each account (since I might be able to get Fidelity "advantage" class shares, etc), but I don't think it would be much.

Ok, I would have to redo the math on everything. I'm really looking for suggestions on what my allocation should be - I'm not set on 80/20.
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Re: Yale vs. Three-Fund

Post by mbenoit116 »

Taylor Larimore wrote: Sat Aug 18, 2018 5:34 pm
abuss368 wrote: Fri Aug 17, 2018 8:52 am As an alternative you could consider the Three Fund Portfolio or the Core-4 for simplicity and effectiveness.
abuss368:

Your "alternative" Second Grader Three Fund Portfolio would have been a good choice:

MarketWatch has a long-running contest between eight "Lazy Portfolios." The Three-Fund Portfolio currently leads Yale U's Unconventional Portfolio for 1-year, 3-year, 5-year and 10-year returns.

Total Returns For Eight Lazy Portfolios

Best wishes.
Taylor
Thanks for the reference! I'll check it out. Very open to a simple, lazy portfolio (although it might be hard to do psychologically, since complexity *seems* like it should produce better results).
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Re: Why the Yale Endowment Hate?

Post by retiredjg »

iceport wrote: Sun Aug 19, 2018 3:19 pm However, for many years it was also nearly as common to see recommendations for splitting the bond allocation 50/50 with TIPS. I guess you're right, I haven't seen that recommendation for quite some time. The question is why not?

What has changed? Do we have some new information that wasn't available before? What have we learned about TIPS that would cause a common 50% TIPS recommendation to be revised to 0%?
You are correct it used to be a common suggestion and it is not often suggested any more. I do not know what has changed, but someone said last week (livesoft?) that it was because people realized that TIPs only protect against unexpected inflation, not expected inflation.

I still think TIPS can be useful in a retirement situation, but I guess a salary can be your inflation protection while still working.
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Re: Why the Yale Endowment Hate?

Post by mbenoit116 »

LadyGeek wrote: Sat Aug 18, 2018 7:55 pm
mbenoit116 wrote: Sat Aug 18, 2018 4:49 pm ...We also have $200k in a trust account in my name that is in cash. Our plan is to get a head start and put $100k into a 529 to save for our future children’s college. $50k will go into a 6 or 12 month CD until we buy a starter home within the next year. Once we move out of this house, we want to rent it. Therefore, we’re planning to invest the remaining $50K in a 3 to 5 year CD, or a 20/80 index portfolio. to buy a second home in 4 to 5 years. Open to suggestions here.

We have a total of about $30k in cash in taxable accounts that we do not plan to invest.
Hang on, do you have any experience in renting real estate? That's a full-time job, not to mention the added stress of dealing with tenants and a more complicate tax return. There is no guarantee on what will happen with your property. Unless you've actually done this before, don't count on rental income for retirement planning.

As they say... "You can borrow for education, but you can't borrow for retirement". You have the best of intentions, but are assuming that life goes as planned. That never happens. Your planned family can always get a loan to fund their education. If you invest all of that money now, you have zero money for retirement.

How does your plan look if you don't start putting money into a 529 plan until your kid(s) are 5 years old? The picture changes dramatically. Some food for thought.

(I retitled the thread and updated the first post to point to the portfolio info.)
Hi LadyGeek,

Sorry for the confusion. The rental income is just for additional income; not retirement planning. I have a friend who rents a few houses in the area, and it sounds like a part-time rather than full time job. We're just looking to rent the one house.

You make a good point regarding education. I was trying not to mention this, but I'm currently set to inherit $1.5 million when my currently 65 year old mother passes away (hopefully in the far future). With this money, as well as contributions to a Roth IRA and to 401(k)'s once I start working, we should be more than set for retirement, and leaving significant funds behind for our kids. So education is a more immediate concern.

However, as I think about it, and as macabre as it is to think about it, by the time our kids start going to college, I will likely have inherited that sum, which I could use to pay for college, and instead we could plow that 100K into 401(k)'s over a period of years. Not sure which route to go.
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Re: Why the Yale Endowment Hate?

Post by retiredjg »

mbenoit116 wrote: Sun Aug 19, 2018 3:33 pm I'm really looking for suggestions on what my allocation should be - I'm not set on 80/20.
80/20 is one of several asset allocations that are appropriate for your age.
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Re: Why the Yale Endowment Hate?

Post by iceport »

retiredjg wrote: Sun Aug 19, 2018 3:40 pm
iceport wrote: Sun Aug 19, 2018 3:19 pm However, for many years it was also nearly as common to see recommendations for splitting the bond allocation 50/50 with TIPS. I guess you're right, I haven't seen that recommendation for quite some time. The question is why not?

What has changed? Do we have some new information that wasn't available before? What have we learned about TIPS that would cause a common 50% TIPS recommendation to be revised to 0%?
You are correct it used to be a common suggestion and it is not often suggested any more. I do not know what has changed, but someone said last week (livesoft?) that it was because people realized that TIPs only protect against unexpected inflation, not expected inflation.

I still think TIPS can be useful in a retirement situation, but I guess a salary can be your inflation protection while still working.
Thanks. I'm not sure I buy the sudden realization that TIPS benefit from unexpected inflation rather than expected inflation. Even I was aware of the distinction back then, and my understanding of bonds is not very deep. My own guess is that it has more to do with how they performed in the 2008/2009 crash, which, in my opinion, is much ado about not much. Perhaps this question is best left to another thread.

For the OP, I would not dissuade you from a 50% bond allocation to TIPS. They still offer diversification benefits by not being perfectly correlated with the other bonds in the portfolio, and they still provide a hedge against unexpected inflation. Just be aware that both of your bond holdings (long term TIPS and long term treasuries) are more volatile than a total bond market index fund would be. But everything is relative. Compared to equities, they both still provide some "ballast" for your portfolio.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
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Re: Why the Yale Endowment Hate? [Request for portfolio help]

Post by LadyGeek »

mbenoit116 wrote: Sun Aug 19, 2018 3:43 pm Hi LadyGeek,

Sorry for the confusion. The rental income is just for additional income; not retirement planning. I have a friend who rents a few houses in the area, and it sounds like a part-time rather than full time job. We're just looking to rent the one house.

You make a good point regarding education. I was trying not to mention this, but I'm currently set to inherit $1.5 million when my currently 65 year old mother passes away (hopefully in the far future). With this money, as well as contributions to a Roth IRA and to 401(k)'s once I start working, we should be more than set for retirement, and leaving significant funds behind for our kids. So education is a more immediate concern.

However, as I think about it, and as macabre as it is to think about it, by the time our kids start going to college, I will likely have inherited that sum, which I could use to pay for college, and instead we could plow that 100K into 401(k)'s over a period of years. Not sure which route to go.
A good rule-of-thumb is to never count inheritances in your planning. Your 65 year old mother could unexpectedly need that $1.5 million for assisted living or unplanned medical expenses, for example.

You should also consider another thought - your kids may not go to college. You want them to do well, but college is not the only way to get there. There are a ton of respectable jobs that earn good pay and don't need college. If your kid wants to be an electrician or plumber, there's absolutely nothing wrong with that. There may not be need to sink a ton of money into a 529 plan now. You won't know how this works out until the time comes many years from now.

Another reason to save for retirement now is that you don't want to depend on your kids to support you down the road. Get yourself going first and reevaluate your situation in a few years.
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"Tips--Why Not?"

Post by Taylor Larimore »

iceport wrote:For many years it was also nearly as common to see recommendations for splitting the bond allocation 50/50 with TIPS. I guess you're right, I haven't seen that recommendation for quite some time. The question is why not?
iceport:

The answer: Whichever asset-class is doing poorly is seldom recommended. Whichever asset-class is doing well is frequently recommended. :(

Knowledgeable investors design a suitable asset-allocation and then stay-the-course.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: "Tips--Why Not?"

Post by iceport »

Taylor Larimore wrote: Sun Aug 19, 2018 6:47 pm
iceport wrote:For many years it was also nearly as common to see recommendations for splitting the bond allocation 50/50 with TIPS. I guess you're right, I haven't seen that recommendation for quite some time. The question is why not?
iceport:

The answer: Whichever asset-class is doing poorly is seldom recommended. Whichever asset-class is doing well is frequently recommended. :(
That's an astute observation, Taylor! I thought about that possibility, but I'm trying not to be cynical. But it's more just an acknowledgement of human nature, from which none of us can escape.

The following charts are certainly compatible with that explanation. Without trying to cherry-pick dates, below is a chart of the 10-year performance for Vanguard Inflation-Protected Securities (VIPSX) [half of Swensen's bond allocation]; the Bloomberg Barclays U.S. Aggregate Float Adjusted Bond Index; Vanguard Intermediate-Term Bond Index Fund (VBILX); Vanguard Total Stock Market Index Fund (VTSAX) (just to give the bond volatility some context); and Vanguard Long-Term Treasury Fund Investor Shares (VUSTX) [the other half of Swensen's bond allocation].

The last 10 years since the Great Recession have not been good to the original TIPS fund, compared to the other funds:
Image

Zooming out, here's the chart since inception of the TIPS fund (just over 18 years):
Image

And finally, here's the performance that was visible to us before the Great Recession, when it was still popular to recommend a 50% TBM/50 TIPS bond allocation — and TIPS were beating everything else:
Image
(Click the image above to get the Morningstar chart.)

It's probably not coincidence that TIPS were often recommended when they were beating the other intermediate term bond index funds.

It would also be interesting to compare the Swenson bond allocation (50% TIPS/50% long term treasuries) to the total bond market index fund in Portfolio Visualizer. The Swensen combination has probably done well over the long term, and even over the last 10 years when TIPS have underperformed.
Taylor Larimore wrote: Sun Aug 19, 2018 6:47 pm Knowledgeable investors design a suitable asset-allocation and then stay-the-course.
So simple, yet so difficult.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
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Re: Why the Yale Endowment Hate?

Post by nedsaid »

retiredjg wrote: Sun Aug 19, 2018 3:40 pm
iceport wrote: Sun Aug 19, 2018 3:19 pm However, for many years it was also nearly as common to see recommendations for splitting the bond allocation 50/50 with TIPS. I guess you're right, I haven't seen that recommendation for quite some time. The question is why not?

What has changed? Do we have some new information that wasn't available before? What have we learned about TIPS that would cause a common 50% TIPS recommendation to be revised to 0%?
You are correct it used to be a common suggestion and it is not often suggested any more. I do not know what has changed, but someone said last week (livesoft?) that it was because people realized that TIPs only protect against unexpected inflation, not expected inflation.

I still think TIPS can be useful in a retirement situation, but I guess a salary can be your inflation protection while still working.
The "stay the course" people didn't stay the course. TIPS were great and now they are not. REITs were great and now they are not. Vanguard added International Bonds to their LifeStrategy and Target Date Retirement funds. Vanguard has been increasing their allotment to International Stocks over time. Vanguard has also tinkered with the glide paths and asset allocation. Even Mr. Bogle made changes in 2000 to his portfolio, there are a couple versions of what he actually did that are floating out there. Even the great Taylor Larimore threw in the towel on TIPS.
A fool and his money are good for business.
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Re: Why the Yale Endowment Hate?

Post by iceport »

nedsaid wrote: Sun Aug 19, 2018 10:39 pm
retiredjg wrote: Sun Aug 19, 2018 3:40 pm
iceport wrote: Sun Aug 19, 2018 3:19 pm However, for many years it was also nearly as common to see recommendations for splitting the bond allocation 50/50 with TIPS. I guess you're right, I haven't seen that recommendation for quite some time. The question is why not?

What has changed? Do we have some new information that wasn't available before? What have we learned about TIPS that would cause a common 50% TIPS recommendation to be revised to 0%?
You are correct it used to be a common suggestion and it is not often suggested any more. I do not know what has changed, but someone said last week (livesoft?) that it was because people realized that TIPs only protect against unexpected inflation, not expected inflation.

I still think TIPS can be useful in a retirement situation, but I guess a salary can be your inflation protection while still working.
The "stay the course" people didn't stay the course. TIPS were great and now they are not. REITs were great and now they are not. Vanguard added International Bonds to their LifeStrategy and Target Date Retirement funds. Vanguard has been increasing their allotment to International Stocks over time. Vanguard has also tinkered with the glide paths and asset allocation. Even Mr. Bogle made changes in 2000 to his portfolio, there are a couple versions of what he actually did that are floating out there. Even the great Taylor Larimore threw in the towel on TIPS.
It's not easy to avoid behavioral errors — but that doesn't mean we should just give up and embrace them.
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Re: Why the Yale Endowment Hate?

Post by nedsaid »

iceport wrote: Sun Aug 19, 2018 10:47 pm
nedsaid wrote: Sun Aug 19, 2018 10:39 pm
retiredjg wrote: Sun Aug 19, 2018 3:40 pm
iceport wrote: Sun Aug 19, 2018 3:19 pm However, for many years it was also nearly as common to see recommendations for splitting the bond allocation 50/50 with TIPS. I guess you're right, I haven't seen that recommendation for quite some time. The question is why not?

What has changed? Do we have some new information that wasn't available before? What have we learned about TIPS that would cause a common 50% TIPS recommendation to be revised to 0%?
You are correct it used to be a common suggestion and it is not often suggested any more. I do not know what has changed, but someone said last week (livesoft?) that it was because people realized that TIPs only protect against unexpected inflation, not expected inflation.

I still think TIPS can be useful in a retirement situation, but I guess a salary can be your inflation protection while still working.
The "stay the course" people didn't stay the course. TIPS were great and now they are not. REITs were great and now they are not. Vanguard added International Bonds to their LifeStrategy and Target Date Retirement funds. Vanguard has been increasing their allotment to International Stocks over time. Vanguard has also tinkered with the glide paths and asset allocation. Even Mr. Bogle made changes in 2000 to his portfolio, there are a couple versions of what he actually did that are floating out there. Even the great Taylor Larimore threw in the towel on TIPS.
It's not easy to avoid behavioral errors — but that doesn't mean we should just give up and embrace them.
Not necessarily saying these were behavioral errors, just saying that intelligent and well informed people changed their minds.

I am a mostly stay the course kind of guy but I have made adjustments to my portfolio over time as well. We are all human.
A fool and his money are good for business.
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Re: Why the Yale Endowment Hate?

Post by iceport »

nedsaid wrote: Sun Aug 19, 2018 10:51 pm
iceport wrote: Sun Aug 19, 2018 10:47 pm
nedsaid wrote: Sun Aug 19, 2018 10:39 pm
retiredjg wrote: Sun Aug 19, 2018 3:40 pm
iceport wrote: Sun Aug 19, 2018 3:19 pm However, for many years it was also nearly as common to see recommendations for splitting the bond allocation 50/50 with TIPS. I guess you're right, I haven't seen that recommendation for quite some time. The question is why not?

What has changed? Do we have some new information that wasn't available before? What have we learned about TIPS that would cause a common 50% TIPS recommendation to be revised to 0%?
You are correct it used to be a common suggestion and it is not often suggested any more. I do not know what has changed, but someone said last week (livesoft?) that it was because people realized that TIPs only protect against unexpected inflation, not expected inflation.

I still think TIPS can be useful in a retirement situation, but I guess a salary can be your inflation protection while still working.
The "stay the course" people didn't stay the course. TIPS were great and now they are not. REITs were great and now they are not. Vanguard added International Bonds to their LifeStrategy and Target Date Retirement funds. Vanguard has been increasing their allotment to International Stocks over time. Vanguard has also tinkered with the glide paths and asset allocation. Even Mr. Bogle made changes in 2000 to his portfolio, there are a couple versions of what he actually did that are floating out there. Even the great Taylor Larimore threw in the towel on TIPS.
It's not easy to avoid behavioral errors — but that doesn't mean we should just give up and embrace them.
Not necessarily saying these were behavioral errors, just saying that intelligent and well informed people changed their minds.

I am a mostly stay the course kind of guy but I have made adjustments to my portfolio over time as well. We are all human.
No, not all of those were behavioral errors. I'm just saying that some of them smack of recency bias and performance chasing — even if they were committed by intelligent and well informed people humans.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
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Re: Why the Yale Endowment Hate?

Post by nedsaid »

iceport wrote: Sun Aug 19, 2018 10:54 pm
nedsaid wrote: Sun Aug 19, 2018 10:51 pm
The "stay the course" people didn't stay the course. TIPS were great and now they are not. REITs were great and now they are not. Vanguard added International Bonds to their LifeStrategy and Target Date Retirement funds. Vanguard has been increasing their allotment to International Stocks over time. Vanguard has also tinkered with the glide paths and asset allocation. Even Mr. Bogle made changes in 2000 to his portfolio, there are a couple versions of what he actually did that are floating out there. Even the great Taylor Larimore threw in the towel on TIPS.
It's not easy to avoid behavioral errors — but that doesn't mean we should just give up and embrace them.
nedsaid wrote: Not necessarily saying these were behavioral errors, just saying that intelligent and well informed people changed their minds.

I am a mostly stay the course kind of guy but I have made adjustments to my portfolio over time as well. We are all human.
iceport wrote: No, not all of those were behavioral errors. I'm just saying that some of them smack of recency bias and performance chasing — even if they were committed by intelligent and well informed people humans.
Well, I didn't want to come right out and say it, but yes, the Bogleheads are guilty of recency bias.
Yes, now I have really said it.

So now there are two really awful things that people can say about you on this forum. One thing is that you time the market. The other thing is that you have recency bias. Both are strictly verboten around here. Another thing is never admit to having a casual attitude towards rebalancing your portfolio. That is like saying that you don't wash your hands or brush your teeth! So I guess there are at least three things that get you in trouble around here. Rebalancing is the next thing to Godliness around here.

So what you do is use a euphemism. Just say you are a momentum investor and that gets you around the recency accusation. Just say opportunistic rebalancing based on some value metric and that gets you past the market-timing accusation. Better yet, say you are overbalancing. One just needs to be creative in choice of words. Rebalancing is cool, market timing is not.

I can just hear someone saying, I overbalanced my TIPS sooo much that I no longer own any.

Got to wash all that market-timing and recency right out of my hair!
A fool and his money are good for business.
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iceport
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Re: Why the Yale Endowment Hate? [Request for portfolio help]

Post by iceport »

Well, thanks for the laugh, nedsaid. Honestly, though, I'm not picking up on your point.
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Re: Why the Yale Endowment Hate? [Request for portfolio help]

Post by nedsaid »

iceport wrote: Sun Aug 19, 2018 11:25 pm Well, thanks for the laugh, nedsaid. Honestly, though, I'm not picking up on your point.
What I am trying to say is that it isn't always easy to tell when to stay the course or to throw in the towel and make a change. One big reason for this is that there are always contrary arguments and contrary evidence for whatever position you take.

Not ridiculing Vanguard, Larimore, or Bogle but just having a little fun with it. The thing is that Vanguard, Larimore, and Bogle have been remarkably consistent but they all made adjustments over time. The consistency is the bias towards lower costs, the bias towards simplicity, and the bias of passive over active. The underlying philosophy has been constant though there have been adjustments in its implementation. The changes have been mostly from learning and experiencing more.

In the case of Taylor Larimore and TIPS, my suspicion is that he felt that a Total Bond Market Index fund was plenty good enough and that TIPS had a very marginal benefit. I can't speak for Taylor, but having read many of his posts, I suspect that is what he would say.

If I never made a change, my IRA would still be in FDIC Insured Certificates of Deposit. I was always willing to venture out and take a chance.

I am also saying that nobody, and I mean nobody is 100% stay the course. We all have our investment sins and we all change our minds.
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Re: Why the Yale Endowment Hate? [Request for portfolio help]

Post by iceport »

Thanks for the explanation! It makes more sense than the image that popped into my head, in which I take on the persona of your conscience, and you take on the persona of the devil on your shoulder, mocking all that is right and just, and egging us on to give in to all of our wanton desires. :shock: :D

Image

All pleasant kidding aside, I still think you are drawing the wrong conclusion.
nedsaid wrote: Sun Aug 19, 2018 11:38 pm What I am trying to say is that it isn't always easy to tell when to stay the course or to throw in the towel and make a change. One big reason for this is that there are always contrary arguments and contrary evidence for whatever position you take.

<snip>

I am also saying that nobody, and I mean nobody is 100% stay the course. We all have our investment sins and we all change our minds.
Observations like these are accurate and insightful. But where I find reason to be more critical of making portfolio changes, the lesson you take away seems to be: "Stay the course? Fuggedaboutit! Tweaking your portfolio is fine. Everybody's doing it. If it feels good, go ahead, just do it. What, me worry?"

Just because the sky hasn't fallen on us doesn't mean we all couldn't have benefited from more discipline over the decades. (I know I could have!)
Last edited by iceport on Mon Aug 20, 2018 9:43 am, edited 1 time in total.
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Re: "Tips--Why Not?"

Post by retiredjg »

iceport wrote: Sun Aug 19, 2018 9:23 pm Zooming out, here's the chart since inception of the TIPS fund (just over 18 years):
Image

And finally, here's the performance that was visible to us before the Great Recession, when it was still popular to recommend a 50% TBM/50 TIPS bond allocation — and TIPS were beating everything else:
Image
I know this was not your intention, but these last two charts make a good visual argument for why people need bonds. Some investors just can't seem to get the fact that bonds can outperform stocks at times - even a decade or more. These charts show that well.
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Re: "Tips--Why Not?"

Post by iceport »

retiredjg wrote: Mon Aug 20, 2018 6:54 am I know this was not your intention, but these last two charts make a good visual argument for why people need bonds. Some investors just can't seem to get the fact that bonds can outperform stocks at times - even a decade or more. These charts show that well.
Right? I did a double-take on those too. Though, they can be a little misleading for those of us that were piling in significant new money throughout the period. Much of those new contributions ended up buying relatively cheap(er) equities. But your point is a good one. It took almost 18 years for equities to outperform several high quality bond index funds — starting from the arbitrary date of the TIPS fund inception.

Another good lesson backed up by the charts here is one that Taylor Larimore repeats often: just about any good, high quality bond fund will serve its purpose well in a portfolio. Here we see that even the choice of a long term bond index fund would have been fine for a long term buy-and-hold investor.

The other thing I noticed was how the intermediate term index fund outperformed the total bond market index fund over every one of these periods. Gee, I wonder why we don't recommend that more often... :wink: (No! I am *NOT* suggesting that. But it would be easy to find some plausible, intelligent-sounding rationale to make that case: zero in on the mortgage-backed securities and blame them. Then point out how those MBS are easily avoided just by switching to the intermediate term index fund.)
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
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"marginal benefit"

Post by Taylor Larimore »

In the case of Taylor Larimore and TIPS, my suspicion is that he felt that a Total Bond Market Index fund was plenty good enough and that TIPS had a very marginal benefit. I can't speak for Taylor, but having read many of his posts, I suspect that is what he would say.
nedsaid:

It is a bit eerie, but you're right. It is exactly what I would say.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Why the Yale Endowment Hate? [Request for portfolio help]

Post by mbenoit116 »

Not to be a spoil-sport, and I'm glad to see the debate, but please help me keep this thread on track, and in response to my initial question :D .
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Re: Why the Yale Endowment Hate?

Post by Angst »

mbenoit116 wrote: Fri Aug 17, 2018 2:05 pm
Angst wrote: Thu Aug 16, 2018 10:51 am
mbenoit116 wrote: Thu Aug 16, 2018 9:04 am[Snip...]

I've been hearing index investors lambasting the Yale model recently. Where is this coming from? It's my understanding that the Yale model is a respected allocation for index investors. Is this allocation no longer any good?
You're new to the website; 1 post so far, no reply from you to the responses you've received from others. You need to explain the above statement, otherwise your post is just trolling. Please clarify your original post.
I was referring to articles like this:
https://www.marketwatch.com/story/a-les ... 2017-02-06
https://seekingalpha.com/article/413295 ... ale?page=2

In the future, please don't jump on me for failing to respond to an initial post less than 2 hours after it's been posted.
My apologies if you felt jumped upon. I'm sure the other posters who also initially looked for more details from you - a new forum member - neither had any intent to jump upon you. I suggest that in the future you understand that (at least at this website) it's appreciated when starting a new thread for the poster to include at least a minimum level of detail required to justify starting a new thread. These links you provided above presumably would have sufficed. If you check out the forum policies you can see that our website takes the maintenance of civility and quality of posting seriously. It makes for a great website.

Even the most benign trollers can casually serve up a vaguely justified new thread with presumably just the hope of generating a fish-feeding frenzy for their own amusement. It's always good policy at this board to post a well-worded new thread, especially if you don't plan on monitoring it in the short/immediate term. It was not unreasonable for all of us who posted early on in this thread to wonder about you, posting this particular new/first-time thread and then just disappearing. Please don't be so quick to take offense! Welcome to the board.
:sharebeer
Last edited by Angst on Mon Aug 20, 2018 10:05 am, edited 1 time in total.
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Re: Why the Yale Endowment Hate? [Request for portfolio help]

Post by Taylor Larimore »

mbeonit:

Sorry to get off track.

I doubt if any investors "Hate" the Yale Endowment. I greatly respect Mr. Swensen and included his book in my "Investment Gems":

Unconventional Success

Best wishes.
Taylor
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Re: Why the Yale Endowment Hate? [Request for portfolio help]

Post by TN_Boy »

mbenoit116 wrote: Mon Aug 20, 2018 9:54 am Not to be a spoil-sport, and I'm glad to see the debate, but please help me keep this thread on track, and in response to my initial question :D .
Your specific question:

I'm a 29 year old investor with some knowledge of index investing. In my Roth IRA, I have the following allocation, which is the Yale Endowment model with a small-cap value tilt:

Total Market 35.0%
Real Estate 20.0%
Small Cap Value 10.0%
International Dev. 15.0%
Emerging Markets 5.0%
TIPS 7.5%
Long-term Treasuries 7.5%

For an 85/15 equity/bond split I personally wouldn't have a big problem with this portfolio. I believe that *most* people on this board would have a lower allocation to REITs (allocating money not put in REITs to probably total market, or perhaps small cap value), and many would prefer intermediate term treasures over long-term. I own most of those asset classes; though not as much in REITs, more in international, and I don't own long term treasuries.

As several have noted, what you list is not the "yale endowment model" it is almost the recommendation in Swensen's book "Unconventional Success" written for individual investors. Versus his reference portfolio, you have 15% in bonds rather than 30%, which, if you want more equity exposure, is fine, and you have 5% more in total market plus the 10% small cap value. It's really a matter of opinion whether this is a good slice and dice portfolio. I think you could do much worse. We won't know for 10 or 20 years what the best allocation would have been ....

This will have some tracking error versus 85% total market and 15% bonds. Be sure that won't bother you (if the error is on the downside).
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Re: "marginal benefit"

Post by pkcrafter »

Taylor Larimore wrote: Mon Aug 20, 2018 9:38 am
In the case of Taylor Larimore and TIPS, my suspicion is that he felt that a Total Bond Market Index fund was plenty good enough and that TIPS had a very marginal benefit. I can't speak for Taylor, but having read many of his posts, I suspect that is what he would say.
nedsaid:

It is a bit eerie, but you're right. It is exactly what I would say.

Best wishes.
Taylor
Of course it's exactly what you would say! You have the well chosen title of "Dean of the Vanguard Diehards." But I think of you as our ballast. Ballast: material placed low in a vessel to improve its stability. You are our reliable stabilizer. Your message is always clear, yet simple.

I came across Taylor in 1998 on the old forum. I redid my portfolio, and in the 20 years since, I've made one change.

Thank you Taylor. :beer

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Re: Why the Yale Endowment Hate? [Request for portfolio help]

Post by iceport »

mbenoit116 wrote: Mon Aug 20, 2018 9:54 am Not to be a spoil-sport, and I'm glad to see the debate, but please help me keep this thread on track, and in response to my initial question :D .
Hi mbenoit116,

You've been very patient with us. We're not always so self-indulgent. But I do hope you are finding some nuggets of wisdom, even in our digressions.

To atone for my part in the derailments, I'll offer my advice.

The Swensen model portfolio is a fine one. (My opinion might be biased because mine is very similar.) But the larger point is that, over the long haul, there are uncounted portfolios that are also fine. The point I hope you take away is in my signature line; finalizing a single reasonable (responsible?) portfolio and sticking with it is more important than the details of what's in that portfolio.

Regarding those specifics, I agree with Swensen's proposed revisions to bump down the REITs and bump up EM:

30% Total Stock Mkt
15% Intl Developed Mkt
10% Emerging Markets
15% Real Estate
15% US Treasury Bonds
15% TIPS

Your proposal to reduce the bond allocation to 15% is reasonable, as is 20%, as is Swensen's generic 30%. Here are links to wiki articles on risk tolerance:

https://www.bogleheads.org/wiki/Risk_tolerance

https://www.bogleheads.org/wiki/Assessi ... _tolerance

I especially like Larry Swedroe's construct breaking down the question into ability, willingness and need to take risk.

Again, no matter what you decide, the important thing is not to abandon your long term choice when short term market events lead you to question your decision.

Good luck with your choices! Sorry for the diversions...
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
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