The David Swensen model of Investing vs the All Seasons based on the All Weather by Ray Dalio

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Captain
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The David Swensen model of Investing vs the All Seasons based on the All Weather by Ray Dalio

Post by Captain » Thu Jan 02, 2020 7:02 am

I’m going through analysis paralysis in deciding which asset allocation model to adopt for my investing Plan.

On one hand I have The David Swensen model of Investing vs the All Seasons based on the All Weather by Ray Dalio on the other.

Obviously they both have great returns and protection.

But which one is best for the average investor in his 40s that is considered a beginner in the world of Investing....asking for a friend???

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nisiprius
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Re: The David Swensen model of Investing vs the All Seasons based on the All Weather by Ray Dalio

Post by nisiprius » Thu Jan 02, 2020 8:13 am

Sorry, is this plan for you or for "a friend?"

Ultimately, one has to take personal responsibility for one's own investments. The best plan is one you believe in strongly enough that you can stay the course, without any big, sudden, panicky changes, even when it is having a bad year or two or three compared to something else.

The biggest decision for an "average investor in his 40s" is how conservative or aggressive to be with stock allocation. That is far more important than the details of the exact stock or bond categories, or whether to invest small percentages in gold or commodities. It is particularly important because there is always a crash sometimes--there have been 17 declines of more than 20% in 148 years, so that's an average of one every eight years, you're not likely to escape them. Speaking personally, my wife and I were both terrified in 2008-2009. People talk as if you could just decide in advance that you will not panic and sell in a downturn. It's harder than just deciding not to panic. We did not sell, but it was a very near thing and only because we were conservatively invested.

A reasonable rough guide to the range of sane allocations is given by this chart, which is based on the benchmarks Morningstar uses for target-date funds. It corresponds quite closely to the ranges of allocations that are really used by mutual fund companies in their target-date funds. Notice how wide the range is:

Image

This chart is saying that some mutual fund companies' target-date funds put as little as 70% in stocks for a 40-year old, some as much as 92%.

Now, specifics. Using PortfolioVisualizer's built-in portfolios as my guide to the composition of the two portfolios:
Source

Swensen:

VTSMX Vanguard Total Stock Mkt Idx Inv 30.00%
VGSIX Vanguard Real Estate Index Investor 20.00%
VTMGX Vanguard Developed Markets Index Admiral 15.00%
VEIEX Vanguard Emerging Mkts Stock Idx Inv 5.00%
VIPSX Vanguard Inflation-Protected Secs Inv 15.00%
VFISX Vanguard Short-Term Treasury Inv 15.00%

Robbins/Dalio "All Seasons"

VTI Vanguard Total Stock Market ETF 30.00%
TLT iShares 20+ Year Treasury Bond ETF 40.00%
IEF iShares 7-10 Year Treasury Bond ETF 15.00%
DBC Invesco DB Commodity Tracking 7.50%
GLD SPDR Gold Shares 7.50%

The first thing to notice is that Swensen's is 70% stocks (VTSMX, VGSIX, VTMGX, and VEIEX are all stocks); Robbins and Dalio's is 30%. I think it's unlikely that there's any investor that would be comfortable with both of them as given. Either you think 70% is too aggressive or 30% is too conservative. That means that the likelihood is that you will need to change or adjust them to match your risk tolerance. I don't know if the books about these portfolios tell how to do that.

The second thing is that the future is just uncertain, and I would add that it is particularly true for gold and commodities. The plain fact of the matter is that since the US cut the dollar loose from gold in 1971, the price of gold has had two giant spikes, so that's two in 48 years. Both gold and stocks have a pattern of large, IMHO unpredictable bursts and crashes, but stocks have had a lot more and so, overall, the growth of money in stocks has been smoother than in gold. Imagine trying to put a straight line through the blue curve (stocks), then through the red curve (gold).

Image

Of course, gold advocates will say that gold is not unpredictable and is all-but-guaranteed to spike just when you need it. (And that guarantee is signed by... who? Mr. Auric Goldfinger?)

There's really no way to say which is "better for an average investor" and I would not trust anyone who makes a flat statement about it.

What can be said is that although Swensen's book was entitled "Unconventional Success," it was the Yale endowment fund that was "unconventional," not his recommendations for personal investors; and the portfolio above is quite in the mainstream of conventional advice nowadays. The "All Seasons" portfolio is more offbeat, and thus more controversial. Although you're invited to see similarities to the "risk parity" strategy Dalio uses in one of his hedge funds, all of the funds and strategies that use the name "risk parity" are using leverage, and the Robbins/Dalio "All Seasons" portfolio does not... so it isn't really the same. It's also unconventional that the Robbins/Dalio portfolio is 100% US, no international investments. I don't personally put a lot of stock in the importance of international investing (ha ha, pun, get it?) but it does make it a little off-center.

Two things that I think can be said is that if you feel strongly in your bones that a crash is imminent,

1) you should not act on that; rather, you should choose a compromise portfolio that you can stick with, not so aggressive that you'll sell in a crash, but not so conservative that you won't stick with it in a long bull market when your aggressively-invested friends are beating you.

2) but if there is a crash, a portfolio that is 30% stocks is not going to fall as much as one that is 70% stocks.

Finally, getting back to personal responsibility, whatever you read or do, sooner or later there will come a time when your portfolio surprises you in a bad way and you will say "But I thought I understood from so-and-so that the pieces of this portfolio work like a well-oiled machine and that when X happened, Y was supposed to happen and take care of it."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: The David Swensen model of Investing vs the All Seasons based on the All Weather by Ray Dalio

Post by nisiprius » Thu Jan 02, 2020 8:28 am

P.S. I think I should say that you should consider a simple three-fund portfolio like the one Taylor Larimore has recommended for ages, and devote your thinking to deciding on the allocation percentages to US stocks, international stocks, and bonds... just a total US stock fund, a total international stock fund, and total bond market, from Vanguard or Schwab or Fidelity or iShares or whomever.

P.P.S. Be careful about that "protection" idea. Risk and reward go together. I believe the high historical return of the stock market, the "equity risk premium," is just what it says--a reward for accepting risk. To think you can enjoy stock returns without really taking the risk is asking too much. Yes, I understand the idea that other asset classes are supposed to click in and fill in the potholes of stocks, and maybe they can do it in a small way, but it's fine tuning, and usually the risk reduction is associated with lower return, too. Remember, if you are willing to accept lower return in order to get lower risk, the trivial and reliable way to do it is simply to put less of your money in stocks (and more in bonds and cash). All strategies involving mixes of asset classes and so on need to be compared to the alternative of sticking to a very simple portfolio and just trimming back stock allocation.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: The David Swensen model of Investing vs the All Seasons based on the All Weather by Ray Dalio

Post by jaybard » Sun Apr 19, 2020 2:29 pm

nisiprius wrote:
Thu Jan 02, 2020 8:13 am

Ultimately, one has to take personal responsibility for one's own investments. The best plan is one you believe in strongly enough that you can stay the course, without any big, sudden, panicky changes, even when it is having a bad year or two or three compared to something else.
Well said! Conviction to stay the course is much easier said than done. I can tell you that I have no conviction behind the all-weather portfolio as I am guessing it is merely a benchmark just like treasury for store value of wealth. I also do not quite understand the use of leverage enough to be able t make better use it it. So it is definitely not for me.

Swensen’s portfolio matches his preaching about using an equity orientation for long term buy-n-hold investor.
-Jay 8

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Re: The David Swensen model of Investing vs the All Seasons based on the All Weather by Ray Dalio

Post by Captain » Sun Apr 19, 2020 2:44 pm

Hey @Jaybard

After being overwhelmed and frustrated with the forecasted results according to my time horizon I decided that I would have to learn Warren Buffet and Mohnish Pabrai style value investing if I want to get the returns I want if I want a chance at retiring earlier.

I understand that it involves deep understanding of the businesses I research and do valuation on.

And I committed to that decision by investing in a course and reading everything I can get my hands on these past few months to bring me up to speed.

I haven’t totally disregarded low cost indexing as I decided in the meantime to model a core satellite strategy and stick with VTI while I learn what I need to for value investing.

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Re: The David Swensen model of Investing vs the All Seasons based on the All Weather by Ray Dalio

Post by jhaddaway » Fri Jul 31, 2020 10:49 am

@nisiprius
First off, that was such a thoughtful response regarding the Swensen vs Dalio portfolio. Thank you for taking the time to write it. The big question I have been curious about lately is using the 10 year or the TLT as a hedge. It seems both Swensen and Dalio are big fans of using government bonds as a hedge/diversifier, but it seems to me that with interest rates this low, there is not enough upside for this to make sense, and enormous downside if rates rise. I would love your thoughts on this.

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Re: The David Swensen model of Investing vs the All Seasons based on the All Weather by Ray Dalio

Post by mav12 » Sat Aug 01, 2020 10:23 am

nisiprius wrote:
Thu Jan 02, 2020 8:28 am
P.S. I think I should say that you should consider a simple three-fund portfolio like the one Taylor Larimore has recommended for ages, and devote your thinking to deciding on the allocation percentages to US stocks, international stocks, and bonds... just a total US stock fund, a total international stock fund, and total bond market, from Vanguard or Schwab or Fidelity or iShares or whomever......

nisiprius, the idea of the 3 fund portfolio is a good one. Personally, I tinker with the allocations because international stocks have underperformed the domestic stocks. Also, thank you for bringing up portfolio visualizer. Have you used the optimization feature of PortfolioVisualizer? I used it on its model portfolios and the results are not that bad and they outperform "historically" the model portfolios.

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Re: The David Swensen model of Investing vs the All Seasons based on the All Weather by Ray Dalio

Post by jjustice » Sat Aug 01, 2020 10:44 am

Very impressive educational response by nisprius. My hat is off to him. Sometimes you get what you need on this forum.

John

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Re: The David Swensen model of Investing vs the All Seasons based on the All Weather by Ray Dalio

Post by abuss368 » Sat Aug 01, 2020 11:42 am

I was fortunate to attend a lecture of David Swensen.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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Re: The David Swensen model of Investing vs the All Seasons based on the All Weather by Ray Dalio

Post by catchup » Sun Aug 02, 2020 11:49 am

Swensen portfolio has served me well.
Has become more conventional as index funds have caught on more.

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