The challenge with the David Swensen/Yale portfolio

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abuss368
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The challenge with the David Swensen/Yale portfolio

Post by abuss368 »

Bogleheads,

I have seen a few posts on this subject pop up on the forum from time to time, so I thought it may be a good opportunity to dicsuss and gets some feedback and thoughts.

I initially liked David Swensen's portfolio (I also have met Dr. Swensen). I have read Dr. Swensen's book where he advises low costs index funds with a stated asset allocation. However, on this forum folks have noticed the problem with this recommended portfolio. Specifically, many of the holdings (i.e. TIPS - 15%, Treasuries - 15%, and REITs - 20%) add up to a total of 50% of the portfolio and should probably be held in a tax advantaged account. A lot of folks simply are not 100% tax advantaged or taxable is the larger of the two accounts. This results in a portfolio that is not as tax efficient and hard to implement.

Unconventional Success did not hammer home tax efficiency too much.
John C. Bogle: “Simplicity is the master key to financial success."
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NoRoboGuy
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Re: The challenge with the David Swensen/Yale portfolio

Post by NoRoboGuy »

Many people hold 401Ks, so maybe he assumes those who had enough to slice and dice have a substantial percentage in tax advantaged accounts?

Location is important, but it may not be a final constraint. REITs and TIPS definitely belong in tax-advantaged if at all possible. The treasuries portion? How about I-Bonds (tax-deferred, $10K limit per person, per year) and high quality munis instead?
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Re: The challenge with the David Swensen/Yale portfolio

Post by Dale_G »

louis has it right.

But with present low treasury rates, holding treasuries in taxable doesn't amount to much tax drag on an absolute basis. Besides, in a few years you should be able to realized some nice tax losses that will more than make up for any interest you received. :sharebeer

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Re: The challenge with the David Swensen/Yale portfolio

Post by tfb »

Dale_G wrote:But with present low treasury rates, holding treasuries in taxable doesn't amount to much tax drag on an absolute basis.
I agree you have to look at it on an absolute basis. When you have limited capacity in tax advantaged accounts, you use them for the most bang. Ask yourself how much tax you are going to shield if you use the space for stocks versus Treasury bonds. At this time you would be wasting the space if you use it for Treasury bonds. At an extreme, although a money market fund is fully taxable, because it pays 0.01%, it needs no shielding.
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Re: The challenge with the David Swensen/Yale portfolio

Post by yobria »

Swensen says repeatedly in the book that this is just a starter portfolio that should be greatly customized to your needs.
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Re: The challenge with the David Swensen/Yale portfolio

Post by MattinAustin »

Really enjoyed Swensen's book but there is no way I could or would model his suggested portfolio. He doesn't like bonds at all but he also wrote the book when treasuries were paying more. I think TIPS were paying inflation rate + 3%. Seems to me he really preached safety but personally I'd rather just hold more bonds and less stocks to balance risk.

All I can do is max out my I-Bonds so between my wife and myself we're at 20k + Vanguard Tips fund 10k annually in our Roth IRA's. No more tax free space after that so its pretty much munis.
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Re: The challenge with the David Swensen/Yale portfolio

Post by midareff »

louis c wrote:Many people hold 401Ks, so maybe he assumes those who had enough to slice and dice have a substantial percentage in tax advantaged accounts?

Location is important, but it may not be a final constraint. REITs and TIPS definitely belong in tax-advantaged if at all possible. The treasuries portion? How about I-Bonds (tax-deferred, $10K limit per person, per year) and high quality munis instead?
Perspective is important..... when you are in the accumulation phase tax avoidance on the distributions they throw off is high on the priority list. When you are retired and looking at these investments for an income stream the situation is much different. :oops:
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Re: The challenge with the David Swensen/Yale portfolio

Post by midareff »

Dale_G wrote:louis has it right.

But with present low treasury rates, holding treasuries in taxable doesn't amount to much tax drag on an absolute basis. Besides, in a few years you should be able to realized some nice tax losses that will more than make up for any interest you received. :sharebeer

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Re: The challenge with the David Swensen/Yale portfolio

Post by Momus »

I posted a while back seeking advice about swensen portfolio. Basically, posters here rip me a new one said I could not do it since I have huge taxable account and no tips + reits in my 401k account.

I compromised by holding more muni (I know swensen doesn't like muni) max ibond for tips, and max my roth with reits... it's still not up to the % I want. Also, I split developed market into pacific and euro like rick ferri recommendation. And tilt to small cap value 30% for domestic equities...

Oh well -.-
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Re: The challenge with the David Swensen/Yale portfolio

Post by MattinAustin »

You can do the REIT's in a Vanguard annuity. Thats what I had to do because of taxable space. I'm not touching the money now anyway. Expenses are higher but if you are in a higher tax bracket it'll quickly cover those fee's. That leaves the taxable space for the TIPS.
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Re: The challenge with the David Swensen/Yale portfolio

Post by abuss368 »

Momus wrote:I posted a while back seeking advice about swensen portfolio. Basically, posters here rip me a new one said I could not do it since I have huge taxable account and no tips + reits in my 401k account.

I compromised by holding more muni (I know swensen doesn't like muni) max ibond for tips, and max my roth with reits... it's still not up to the % I want. Also, I split developed market into pacific and euro like rick ferri recommendation. And tilt to small cap value 30% for domestic equities...

Oh well -.-
Hi momus,

You can place any fund in any account if that is what work for YOU! Only you can design the right portfolio for your risks, needs, etc.

Best.
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Re: The challenge with the David Swensen/Yale portfolio

Post by Momus »

abuss368 wrote:You can place any fund in any account if that is what work for YOU!
Yes, you can place whatever fund you want but it will not be tax efficient... All I am saying is it's hard to make Swensen's portfolio into reality and still be tax efficient if you have 4:1 taxable/tax deferred accounts and no TIPS, REITS in your tax deferred.
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Re: The challenge with the David Swensen/Yale portfolio

Post by abuss368 »

Momus wrote: Yes, you can place whatever fund you want but it will not be tax efficient... All I am saying is it's hard to make Swensen's portfolio into reality and still be tax efficient if you have 4:1 taxable/tax deferred accounts and no TIPS, REITS in your tax deferred.

Hi Momus,

Exactly.

That was the thought behind my original post on this topic. I did not get a strong sense that the book Unconventional Success really discussed tax efficiency too much. Overall I did enjoy reading this book, however there was only a small discussion on tax efficiency.

Many of the other Bogleheads recommended books, such as books written by Jack Bogle, have discussed this topic at length.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: The challenge with the David Swensen/Yale portfolio

Post by abuss368 »

Thank you Bogleheads.

Any more thoughts or feedback out there?

Best.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: The challenge with the David Swensen/Yale portfolio

Post by catchup »

I seem to remember unconv success discusses option of tax free munis on taxable acct.

Reits is 15% in one more recent iteration.

Use of variable annuity for reits sounds like a good option.

Ive been pleased with my swensen based portfolio.

Tips and treasuries have done great and served their intended purpose.

I suspect that swensen would stand by his original ideas even with low rates but who knows. So far so good though.
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