David Swensen says "never have anything weighted more than 30%"

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neomutiny06
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David Swensen says "never have anything weighted more than 30%"

Postby neomutiny06 » Mon Dec 26, 2016 10:28 am

I was reading Tony Robbins "Master The Game" and in it, he interviews Swensen who says one of his rules for diversification is to never have anything weighted more than 30%.

Robbins: "And so you put the first 30% where?"
Swensen: "US Stocks. And then I probably put 10% emerging markets, 15% in foreign development, and 15% in real estate investment trusts." And then for his fixed income, he has 30% of that, all in Treasury securities.

My question is, where did this 30% max rule come from?

I know for me, I have almost 40% of my total portfolio in the Total US Stock Market. The only way I can get that down to 30% is if I invested in REITs as a separate asset class, which I chose not to do. Also, I have more than 30% invested in bonds which would also break Swensen's rule.

Thoughts on using his advice the right way?

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Re: David Swensen says "never have anything weighted more than 30%"

Postby livesoft » Mon Dec 26, 2016 10:49 am

The real question is: Why would you want to use his advice anyways?

For any asset class that you want to have 30% or more of your portfolio in, I think you can just split that asset class into two or more asset classes. You have basically done that by splitting out REITs. Other examples:

60% stocks -> 30% US Stocks, 30% foreign stocks
60% US stocks -> 30% Large-cap US stocks, 30% small-cap US stocks.

35% foreign stocks: 27% developed markets, 8% emerging markets

40% bonds: 30% Total US Bond, 10% short-term corporate bonds

And you can go on and on and on. You might find out what are all the possible asset classes that Swenson is talking about.
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Re: David Swensen says "never have anything weighted more than 30%"

Postby Erwin » Mon Dec 26, 2016 10:54 am

I would not dare challenging Swensen, but I think that his is too general of a statement. Two examples:
1. Someone in retirement cannot possible avoid having more than 30% in bonds, and typically no risk bonds, I.e., treasuries.
2. The allocation of the world equity index is about 50% in the US market. Someone just started investing that favors a completely passive strategy would own a world equity index fund and have enough in equities, easily violating the 30% rule on US stocks.
I would ignore the rule.
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Re: David Swensen says "never have anything weighted more than 30%"

Postby normaldude » Mon Dec 26, 2016 11:19 am

His REIT fund will likely own US REIT stocks, so he'll be over 30% US stocks.

I never understood the REIT allocation. If you own Vanguard Total Stock Market Index Fund, you already own all the stocks, including all the US REIT stocks.

Adding a REIT allocation just means doubling up on an industry. It would be like doubling up on tech or banking or airlines or whatever.

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Re: David Swensen says "never have anything weighted more than 30%"

Postby CABob » Mon Dec 26, 2016 11:24 am

Swensen is apparently talking about one of his personal rules. I'm almost positive that he is not suggesting that it is an appropriate rule for all investors.
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Re: David Swensen says "never have anything weighted more than 30%"

Postby dgm » Mon Dec 26, 2016 11:44 am

CABob wrote:Swensen is apparently talking about one of his personal rules. I'm almost positive that he is not suggesting that it is an appropriate rule for all investors.


I don't know the context of the interview but it could also be in reference to the Yale endowment. Also I agree w/ others here I don't think he meant it as a "it applies to everyone in all situations" sort of advice.

Finally by "asset class" he is probably referring to his (yale endownment's) breakdown of what constitutes an 'asset class'.

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Re: David Swensen says "never have anything weighted more than 30%"

Postby nisiprius » Mon Dec 26, 2016 11:53 am

livesoft wrote:...For any asset class that you want to have 30% or more of your portfolio in, I think you can just split that asset class into two or more asset classes...
Bingo.

"Asset class" seems to be one of those words like "risk" or "diversification" that means approximately nothing.

In Ye Olde Days I thought there were three "asset classes:" equity or stocks, debt or bonds, and cash. And, you know what? Usually, most of the time, two different people will agree on whether some particular security is a "stock" or a "bond."

I don't understand how something like "small-cap value" can be an "asset class" when nobody agrees on what stocks qualify to be in it, or how REITS can be an "asset class" when it used to be part of the "financial" sector and now is in a sector of its own. Nobody can tell for sure whether South Korea is a "developed market" or an "emerging market."

These things seem to magically acquire reality by having been given a name.
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Re: David Swensen says "never have anything weighted more than 30%"

Postby juanovo » Mon Dec 26, 2016 11:54 am

I think this is a general rule Swensen suggests in his recommended allocation but it is missing some of the larger context. He generally believes that the portfolio should be adapted for individual needs, abilities and circumstances. Swensen recommends the following for individual investors: 50% equity (30% US Total Market 20% international developed market 5%/10%emerging markets) 30% fixed income (15% nominal US Treasuries with an average duration matching the market, 15% TIPs) and 20%/15% Real Estate preferably like TIAA Real estate rather than REITs.

He suggests that home owners may allocate less to TIPs because of the historic inflation protection in home ownership. A real estate owner or manager less to REITs and a business owner less to securities overall. Money needed in the next ten years he believes should be held in cash or near cash instruments (short bonds, money market cds etc.) and out of the overall investing portfolio.

He considers TIAA Real Estate to be a separate assets class than equities and while he says REITs can play that role admits that they are more equity like than TIAA Real Estate.

As far as I can tell he doesn't necessarily consider this retirement portfolio per se rather an investment portfolio.

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Re: David Swensen says "never have anything weighted more than 30%"

Postby TdF fan » Mon Dec 26, 2016 12:09 pm

neomutiny06 wrote:My question is, where did this 30% max rule come from? .


As mentioned above, Swensen has six core assets classes for individual investors: domestic equity, foreign developed equity, emerging market equity, real estate, US TBonds, US TIPS. His rules and rationales are explained in his book Unconventional Success, A Fundamental Approach to Personal Investing. From page 83:

David Swensen wrote:Begin the portfolio structuring process...using the six core assest classes. The necessity that each class matter indicates a minimum of a 5 to 10 percent allocation. The requirement that no asset class matter too much dictates a maximum of a 25 or 30 percent allocation.


My interpretation is the 30% max rule is so that if(when) one asset class sinks, it doesn't sink the entire portfolio.

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Re: David Swensen says "never have anything weighted more than 30%"

Postby arcticpineapplecorp. » Mon Dec 26, 2016 12:25 pm

NormalDude,
I believe Rick Ferri used to talk about setting up a portfolio to mirror the total economy. As a result, Rick stated:
Real estate is a significant part of the economy, but only a small part of the stock market. A portfolio can be enhanced to more closely align with the economy by magnifying the amount in real estate through an equity REIT index fund or ETF.

https://portfoliosolutions.com/latest-l ... -portfolio
viewtopic.php?t=91615

Regarding the OP, not having more than a 1/3d of one's assets is apparently a very old rule:
The Talmud (Baba Metzia 42a) expanded on that approach: “And Rebbe Yitzchak said, ‘A person should always divide his money into three: one third in land, one third in commerce, and one third at hand’.”

In terms of modern investing, this advice can be understood in different terms. Land gives low but safe returns. Commerce offers the possibility of high returns, but at a much higher risk. The final advice of the Talmud is to keep one third in liquid assets.

Read more at https://www.breakingisraelnews.com/5284 ... VBSA1dT.99
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Re: David Swensen says "never have anything weighted more than 30%"

Postby telemark » Mon Dec 26, 2016 12:56 pm

From chapter four of Swensen's book Unconventional Success
Begin the portfolio structuring process by considering the issue of diversification, using the six core asset classes. The necessity that each asset class matter indicates a minimum of a 5 or 10 percent allocation. The requirement that no asset class matter too much dictates a maximum of a 25 or 30 percent allocation. The basic math of diversification imposes structural parameters on the portfolio construction process.

If you want to understand Swensen's reasoning I recommend reading the entire book. Arguing over little fragments doesn't do justice to the whole, and you will understand the answer better when you do the work yourself :wink:

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Re: David Swensen says "never have anything weighted more than 30%"

Postby neomutiny06 » Mon Dec 26, 2016 1:02 pm

telemark wrote:From chapter four of Swensen's book Unconventional Success
Begin the portfolio structuring process by considering the issue of diversification, using the six core asset classes. The necessity that each asset class matter indicates a minimum of a 5 or 10 percent allocation. The requirement that no asset class matter too much dictates a maximum of a 25 or 30 percent allocation. The basic math of diversification imposes structural parameters on the portfolio construction process.

If you want to understand Swensen's reasoning I recommend reading the entire book. Arguing over little fragments doesn't do justice to the whole, and you will understand the answer better when you do the work yourself :wink:


Right. Because that statement out of context does not sound practical. If one is 80% stocks, they are likely to have 40% or more in US stocks alone (if they chose not to overweight REITs)

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Re: David Swensen says "never have anything weighted more than 30%"

Postby garlandwhizzer » Mon Dec 26, 2016 1:04 pm

CaBob wrote:
Swensen is apparently talking about one of his personal rules. I'm almost positive that he is not suggesting that it is an appropriate rule for all investors.


1+

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Re: David Swensen says "never have anything weighted more than 30%"

Postby telemark » Mon Dec 26, 2016 1:12 pm

garlandwhizzer wrote:
CaBob wrote:
Swensen is apparently talking about one of his personal rules. I'm almost positive that he is not suggesting that it is an appropriate rule for all investors.


1+

Garland Whizzer

I rather think he is, actually. Certainly the principles are meant to be applied in relation to the needs of the individual investor.

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Re: David Swensen says "never have anything weighted more than 30%"

Postby dbr » Mon Dec 26, 2016 1:35 pm

telemark wrote:From chapter four of Swensen's book Unconventional Success
Begin the portfolio structuring process by considering the issue of diversification, using the six core asset classes. The necessity that each asset class matter indicates a minimum of a 5 or 10 percent allocation. The requirement that no asset class matter too much dictates a maximum of a 25 or 30 percent allocation. The basic math of diversification imposes structural parameters on the portfolio construction process.

If you want to understand Swensen's reasoning I recommend reading the entire book. Arguing over little fragments doesn't do justice to the whole, and you will understand the answer better when you do the work yourself :wink:


Absolutely. You just can't take these things out of the context of the discussion and start to apply them in the abstract and as absolutes. We don't even know what the asset classes we are talking about are without reading the book.

I also agree that throwing labels and terms around inevitably leads to confusion and bad thinking

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Re: David Swensen says "never have anything weighted more than 30%"

Postby stemikger » Mon Dec 26, 2016 1:44 pm

I wouldn't get hung up on this. I would either use John Bogle's two fund portfolio or Taylor Larimore's three fund portfolio and call it a day.
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Re: David Swensen says "never have anything weighted more than 30%"

Postby jalbert » Mon Dec 26, 2016 1:51 pm

I would not dare challenging Swensen, but I think that his is too general of a statement. Two examples:
1. Someone in retirement cannot possible avoid having more than 30% in bonds, and typically no risk bonds, I.e., treasuries.

Actually he does recommend a portfolio where nominal treasuries and TIPs are each 15%, and the remaining 70% is in equities and REITs. If one wants to be less aggressive, he recommends holding a combination of that 70/30 portfolio and cash.

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Re: David Swensen says "never have anything weighted more than 30%"

Postby laughlinlvr » Mon Dec 26, 2016 1:55 pm

In "Unconventional Success" in an otherwise very well reasoned, researched and presented book, Swenson states that the S&P500 Equal-weight ETF (ticker: RSP) is the worst way to invest in the broader market. To be fair, his argument focuses on tax efficiency.
RSP has outperformed the S&P 500 in all of its 14 years of existence.
In a tax-deferred account RSP is therefore the best way to invest in the broader market.
I have since followed Swenson to see if this was a one-off blunder and it looks like it has been.
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Re: David Swensen says "never have anything weighted more than 30%"

Postby nisiprius » Mon Dec 26, 2016 2:13 pm

TdF fan wrote:...Swensen has six core assets classes for individual investors: domestic equity, foreign developed equity, emerging market equity, real estate, US TBonds, US TIPS... My interpretation is the 30% max rule is so that if(when) one asset class sinks, it doesn't sink the entire portfolio.
Portfolio 1, blue, follows that rule, with less than 30% in each of the four "different" asset classes: domestic equity, foreign developed equity, emerging market equity, and real estate. Portfolio 2, red, breaks that rule, committing all 100% of the portfolio to a single asset class, domestic equity.

When domestic equity (red curve) sank, what happened to the blue curve (with no more than 25% in any of four "asset classes?) Did the other three "asset classes" stop the entire portfolio (blue curve) from sinking?

Image

Come on, folk. Those so-called "asset classes" are not the least bit independent. Keeping your commitment to any of them down to 30% may have some kind of psychological value in preventing you from falling in love with anything, but there's no objective science behind it.
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Re: David Swensen says "never have anything weighted more than 30%"

Postby larryswedroe » Mon Dec 26, 2016 3:00 pm

Let me offer a different perspective. Instead of thinking of asset classes think of exposure to factors that explain returns.

There you can limit exposure to say no more than 30% to any factor.

For example, an older investor with say 70% in a high quality intermediate bond fund would have exposure to the term factor (and inflation risk) of 0.7 x about .25 or less than 0.2. And if they held 30% equities with loadings of say .3 on size and value then they would have exposure to beta of 0.3 and to size and value of 0.1, a sort of risk parity type portfolio, with no one risk dominating the portfolio.

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Re: David Swensen says "never have anything weighted more than 30%"

Postby normaldude » Mon Dec 26, 2016 6:16 pm

arcticpineapplecorp. wrote:NormalDude,
I believe Rick Ferri used to talk about setting up a portfolio to mirror the total economy. As a result, Rick stated:
Real estate is a significant part of the economy, but only a small part of the stock market. A portfolio can be enhanced to more closely align with the economy by magnifying the amount in real estate through an equity REIT index fund or ETF.

https://portfoliosolutions.com/latest-l ... -portfolio
viewtopic.php?t=91615


I disagree with this strategy.

1) Buying REITs is not the same as buying real estate, just as buying gold mining stocks is not the same as buying physical gold. When you buy a stock, you are investing in a company & the management, that can go make bad decisions, over leverage, commit fraud, go bankrupt, etc.

2) Small businesses are a large part of the US economy. Does that mean bogleheads should buy small businesses? If there's a stock that owns a lot of small businesses, does that mean we should overweight that stock?

3) If anything, a boglehead should be looking to add allocations that aren't closely tied to the US economy. After all, when the US economy is crashing, you're losing your job, your home is being foreclosed, the last thing you want is to make sure your fortunes are even more deeply tied to a crashing US economy.

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Re: David Swensen says "never have anything weighted more than 30%"

Postby grok87 » Mon Dec 26, 2016 8:08 pm

Good discussion.

Having read his "Unconventional Success" and been heavily influenced by it, my view is that he DOES intend the quoted advice for all investors.

But again, context is important. The context here is that this is meant to be one's "long term" portfolio. By that he means for investing with a horizon of 10 years or greater. In the book (as later modified) he states the following approach for time horizon:

10 years or more: Long term portfolio: Basically 30% US Stocks, 25% International Stocks, 15% Real Estate, 15% Treasuries, 15% TIPs
2 years or less: 100% cash

years in between: interpolate. For example with a 8 year horizon you would be 75% in the Long Term Portfolio and 25% in cash
so 22.5% US Stocks, 18.75% International Stocks, 11.25% Real Estate, 11.25% Treasuries, 11.25% TIPs, 25% Cash
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Re: David Swensen says "never have anything weighted more than 30%"

Postby neomutiny06 » Mon Dec 26, 2016 8:35 pm

grok87 wrote:Good discussion.

Having read his "Unconventional Success" and been heavily influenced by it, my view is that he DOES intend the quoted advice for all investors.

But again, context is important. The context here is that this is meant to be one's "long term" portfolio. By that he means for investing with a horizon of 10 years or greater. In the book (as later modified) he states the following approach for time horizon:

10 years or more: Long term portfolio: Basically 30% US Stocks, 25% International Stocks, 15% Real Estate, 15% Treasuries, 15% TIPs
2 years or less: 100% cash

years in between: interpolate. For example with a 8 year horizon you would be 75% in the Long Term Portfolio and 25% in cash
so 22.5% US Stocks, 18.75% International Stocks, 11.25% Real Estate, 11.25% Treasuries, 11.25% TIPs, 25% Cash


That's what I figured. He does intend for that to be a rule for all investors to properly diversify. However, if one is 80% stocks, and does not want to use a REIT fund, how is it possible to be 30% or under in either US or Foreign stocks?

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Re: David Swensen says "never have anything weighted more than 30%"

Postby brad.clarkston » Mon Dec 26, 2016 8:42 pm

normaldude wrote:
arcticpineapplecorp. wrote:NormalDude,
I believe Rick Ferri used to talk about setting up a portfolio to mirror the total economy. As a result, Rick stated:
Real estate is a significant part of the economy, but only a small part of the stock market. A portfolio can be enhanced to more closely align with the economy by magnifying the amount in real estate through an equity REIT index fund or ETF.

https://portfoliosolutions.com/latest-l ... -portfolio
viewtopic.php?t=91615


I disagree with this strategy.

1) Buying REITs is not the same as buying real estate, just as buying gold mining stocks is not the same as buying physical gold. When you buy a stock, you are investing in a company & the management, that can go make bad decisions, over leverage, commit fraud, go bankrupt, etc.

2) Small businesses are a large part of the US economy. Does that mean bogleheads should buy small businesses? If there's a stock that owns a lot of small businesses, does that mean we should overweight that stock?

3) If anything, a boglehead should be looking to add allocations that aren't closely tied to the US economy. After all, when the US economy is crashing, you're losing your job, your home is being foreclosed, the last thing you want is to make sure your fortunes are even more deeply tied to a crashing US economy.


Not sure I understand the logic here ... so what I'm reading is if I own a home and have a job my portfolio should be 50% ex-us stock and 50% ex-us bond ?

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Re: David Swensen says "never have anything weighted more than 30%"

Postby joe8d » Mon Dec 26, 2016 8:50 pm

If a person owned only TSM or S&P 500 for the stock allocation,I think they would do just fine.
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Re: David Swensen says "never have anything weighted more than 30%"

Postby Angst » Mon Dec 26, 2016 9:09 pm

Larry,

Your recent post above in this thread got me thinking, and I started wondering about looking at the typical equity/bond ratio asset allocation people commonly focus on in their IPS with regard to your focus on factors. Is focusing on asset classes with regards to ones IPS passe these days? I.e., should we now be focusing solely on factors (rather than asset classes) from here on out? I bring this up particularly because I think of how AQR breaks out QSPIX and its factor factor exposures with regards to how momentum and quality (and others?) can be accessed through bonds and currency as much as through equity, rather than the other way around. So my general question is this: Should we be looking primarily at factors rather than the classic, equity vs fixed income paradigm that seems to have been largely etched in stone in IPS planning? Well, perhaps I'm answering my own question here: "Beta" doesn't transcend asset classes in the way other factors seem to do; i.e. equity beta is wholly separate from fixed income beta. Is that right? Does that answer my question?

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Re: David Swensen says "never have anything weighted more than 30%"

Postby grok87 » Mon Dec 26, 2016 9:28 pm

neomutiny06 wrote:
grok87 wrote:Good discussion.

Having read his "Unconventional Success" and been heavily influenced by it, my view is that he DOES intend the quoted advice for all investors.

But again, context is important. The context here is that this is meant to be one's "long term" portfolio. By that he means for investing with a horizon of 10 years or greater. In the book (as later modified) he states the following approach for time horizon:

10 years or more: Long term portfolio: Basically 30% US Stocks, 25% International Stocks, 15% Real Estate, 15% Treasuries, 15% TIPs
2 years or less: 100% cash

years in between: interpolate. For example with a 8 year horizon you would be 75% in the Long Term Portfolio and 25% in cash
so 22.5% US Stocks, 18.75% International Stocks, 11.25% Real Estate, 11.25% Treasuries, 11.25% TIPs, 25% Cash


That's what I figured. He does intend for that to be a rule for all investors to properly diversify. However, if one is 80% stocks, and does not want to use a REIT fund, how is it possible to be 30% or under in either US or Foreign stocks?

Well i think he would tell you not to do that.

By the way in the book, he doesn't come off as super excited about reits. He's more in favor of direct real estate i think like the tiAa real estate fund.

If you eliminate reits, i imagine he might say to up the treasuries and tips?
So 30 us stocks, 30 intl stocks, 20 treasuries, 20 tips.

He's generally in favor of broad diversificAtion among assets that are intrinsicAlly different from each other. In other words where there is an intrinsic reason to believe the assets will perform differently than each other. As opposed to assets that have happened to perform differently in recent times by chance.
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Re: David Swensen says "never have anything weighted more than 30%"

Postby abuss368 » Mon Dec 26, 2016 9:31 pm

normaldude wrote:1) Buying REITs is not the same as buying real estate, just as buying gold mining stocks is not the same as buying physical gold. When you buy a stock, you are investing in a company & the management, that can go make bad decisions, over leverage, commit fraud, go bankrupt, etc.


It is not the same however, in terms of real estate, Ralph Block (i.e. "Investing in REITs") will note that there is no one ideal way to invest in real estate. There are three ways noted in his book: a) Direct Ownership, b) Limited Partnership, and c) REITs. And all three categories have advantages and disadvantages.

A very good book and I highly recommend it. I learned a lot.
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Re: David Swensen says "never have anything weighted more than 30%"

Postby AlohaJoe » Mon Dec 26, 2016 9:35 pm

nisiprius wrote:And, you know what? Usually, most of the time, two different people will agree on whether some particular security is a "stock" or a "bond."


Except for investment-grade corporate bonds ("equity-like characteristics"), high-yield corporate bonds ("strong equity-like characteristics"), emerging markets bonds ("definitely equity like characteristics")...and all the other bonds that people often say not to use in the bond part of the portfolio because they aren't bond-y enough :D

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Re: David Swensen says "never have anything weighted more than 30%"

Postby TdF fan » Mon Dec 26, 2016 10:04 pm

nisiprius wrote:
TdF fan wrote:...Swensen has six core assets classes for individual investors: domestic equity, foreign developed equity, emerging market equity, real estate, US TBonds, US TIPS... My interpretation is the 30% max rule is so that if(when) one asset class sinks, it doesn't sink the entire portfolio.
Portfolio 1, blue, follows that rule, with less than 30% in each of the four "different" asset classes: domestic equity, foreign developed equity, emerging market equity, and real estate. Portfolio 2, red, breaks that rule, committing all 100% of the portfolio to a single asset class, domestic equity.

When domestic equity (red curve) sank, what happened to the blue curve (with no more than 25% in any of four "asset classes?) Did the other three "asset classes" stop the entire portfolio (blue curve) from sinking?


Ok, point taken. My interpretation is (probably) incorrect. On the other hand, I notice that you did not include the two other core classes in your example. Why? Probably because you can't take one of his rules out of context (like I did, in trying to answer the OP's question) and understand what his portfolio recommendations are and the reasoning behind them.

Allow me to add the other two core classes in his recommended amounts to your example and see what happens:
Image
Image

Hmm, it still sank. Darn. I was wrong. On the other hand, it didn't go down quite as much as the other two examples and bobbed back to the surface more quickly.

I will reiterate what others above have said, one would need to read his book to understand the rationale behind his recommendations, scientific or no.

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Re: David Swensen says "never have anything weighted more than 30%"

Postby abuss368 » Mon Dec 26, 2016 11:35 pm

If I remember correctly, I once reviewed an analysis that also included Rick Ferri's Core Four. The Core Four and Swensen's investment portfolio had practically the same results. However, Core Four has less complexity and less funds.
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Re: David Swensen says "never have anything weighted more than 30%"

Postby juanovo » Mon Dec 26, 2016 11:59 pm

TdF,

I wonder if you'd run the portfolio again with long bonds instead of intermediate bonds and once more with a bond barbell of long bonds and short term bonds. It is my reading of Unconventional Success that he originally recommended long bonds and then clarified that the bond allocation should match the duration of intermediate term fund or the total bond market overall. It is my understanding that he recommended the long bonds because they have historically were not correlated (not inveresly correlated) with stocks. I believe others have suggested long bonds as a counter balance to high equity allocations as well. I think he is not very excited about REITS and much prefers TIAA Real Estate for its direct ownership structure.

I think the interesting part about nisiprius's critique is that indeed there is little likelihood of one factor or asset zagging when the other zigs, of course it happens and bonds certainly act as a ballast. At the same time Swensen recommends any need under 2-10 years end up in near cash so now you know what the "long run" is and how long you'll be expected to wait it out before something recovers. I appreciate that aspect of Swensen's advice.

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Re: David Swensen says "never have anything weighted more than 30%"

Postby leonard » Tue Dec 27, 2016 12:07 am

How is one jeopardizing their diversity by investing 30% or a bit more in a very diversified index fund? How does that make sense?
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Re: David Swensen says "never have anything weighted more than 30%"

Postby nisiprius » Tue Dec 27, 2016 8:29 am

TdF fan wrote:...Ok, point taken. My interpretation is (probably) incorrect. On the other hand, I notice that you did not include the two other core classes in your example. Why? Probably because you can't take one of his rules out of context (like I did, in trying to answer the OP's question) and understand what his portfolio recommendations are and the reasoning behind them.

Allow me to add the other two core classes in his recommended amounts to your example and see what happens...

Hmm, it still sank. Darn. I was wrong. On the other hand, it didn't go down quite as much as the other two examples and bobbed back to the surface more quickly....
It's well known that there's a behavioral bias in terms of recency--we overweight what has happened recently. I think there's another one. I don't know if it's well known to the scholars or has a name, but I will call it the "one great shining moment" problem; that is to say, when an asset class has one great shining moment in which it does something amazing, we are apt to think that this is a general rule, or a characteristic of the class, and that it "tends to" do that "whenever" other events recur.

In the case of slice-and-dice, several asset classes had one great shining moment in 2000-2002. A number of classes went up, and by a lot, not the piddledinking amount most bonds went up in 2008-2009. During 2000-2002, a portfolio of stock categories did mitigate risk (and I, not holding them, experienced a blow that could have been cushioned). For example: (WARNING: I am not using Swensen's classes exclusively, I'm throwing in a ringer--small-cap value. Why? Because in hindsight I know what it did. Of course.)

Source

Image

So the question is: are the people who say there is significant safety in diversification within a major class--smart beta, slice-and-dice, factors within stocks instead of a total marekt fund--basically right, and I am just overweighting the 2008-2009 experience? Or, is the conventional story of multi-asset investing overweighting the 2000-2002 experience, when a lot of stuff really did what it was "supposed" to do, and conveniently ignoring the grotesque failure in 2008-2009?

(Notice that it's very easy to play the game of throwing out inconvenient facts that don't prove your point by suggesting that they are outliers representing completely unprecedented situations, so let's just look at "normal" periods of time).

The problem is the extreme burstiness of financial data, and, thus, the limited number of data points one is really working with. Financial performance isn't smooth and steady. It comes in short bursts. 2000-2002, bang! 2008-2009, bang! You only get a few of them, and even a period of time like twenty, thirty, fifty years still only includes a few of them... and thus all the pretty statistics are largely invalid because they change completely if you move the endpoints to include or exclude one of those bursts.
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Re: David Swensen says "never have anything weighted more than 30%"

Postby neomutiny06 » Tue Dec 27, 2016 8:59 am

grok87 wrote:
neomutiny06 wrote:
grok87 wrote:Good discussion.

Having read his "Unconventional Success" and been heavily influenced by it, my view is that he DOES intend the quoted advice for all investors.

But again, context is important. The context here is that this is meant to be one's "long term" portfolio. By that he means for investing with a horizon of 10 years or greater. In the book (as later modified) he states the following approach for time horizon:

10 years or more: Long term portfolio: Basically 30% US Stocks, 25% International Stocks, 15% Real Estate, 15% Treasuries, 15% TIPs
2 years or less: 100% cash

years in between: interpolate. For example with a 8 year horizon you would be 75% in the Long Term Portfolio and 25% in cash
so 22.5% US Stocks, 18.75% International Stocks, 11.25% Real Estate, 11.25% Treasuries, 11.25% TIPs, 25% Cash


That's what I figured. He does intend for that to be a rule for all investors to properly diversify. However, if one is 80% stocks, and does not want to use a REIT fund, how is it possible to be 30% or under in either US or Foreign stocks?

Well i think he would tell you not to do that.

By the way in the book, he doesn't come off as super excited about reits. He's more in favor of direct real estate i think like the tiAa real estate fund.

If you eliminate reits, i imagine he might say to up the treasuries and tips?
So 30 us stocks, 30 intl stocks, 20 treasuries, 20 tips.

He's generally in favor of broad diversificAtion among assets that are intrinsicAlly different from each other. In other words where there is an intrinsic reason to believe the assets will perform differently than each other. As opposed to assets that have happened to perform differently in recent times by chance.


So you believe even for a young person, Swensen would advise a balanced portfolio with a large amount of bonds?

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Re: David Swensen says "never have anything weighted more than 30%"

Postby neomutiny06 » Tue Dec 27, 2016 9:04 am

I found an article where Swensen discusses this:

"Adjust your portfolio as you age

When it comes to investing, Swensen says, "there is no such thing as one size fits all." His model portfolio is "well-diversified, equity-oriented for long-term investors and efficient in the sense that it is as good or better than other alternatives," he says. "So my model portfolio should serve most investors well."

Essentially, what Swensen is saying is that when you're investing for long periods of time — 20 or 30 years, for example — you are likely to make more money holding a sizable portion of your portfolio in stocks or other assets with a high expected rate of return. That's because historically, stocks offer greater returns than "safer" alternatives such as U.S. Treasury bonds over the long term. But in the short term, stocks tend to be much more volatile. So as people near retirement age, many investment advisers suggest shifting more assets to the "safer than stocks" category. If the stock market crashes and you need to be spending money out of your portfolio as income in retirement, you don't want to suddenly lose 20 or 30 percent of your savings and be forced to sell stocks at a low price. If you're younger and stocks crash, you can just hang tight and wait for the market to recover.

But it's not all about age. It's also about appetite for risk. "Risk tolerance is specific to each individual. Risk-averse investors may want to hold a combination of the model portfolio and cash, which will reduce overall risk," Swensen says. "As wealth increases, tolerance for risk may increase. As investors grow older, tolerance for risk may decrease. Each individual needs to find a portfolio that matches their risk preferences."

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Re: David Swensen says "never have anything weighted more than 30%"

Postby larryswedroe » Tue Dec 27, 2016 10:43 am

Angst
First, yes SOME factors work across asset classes, like value and carry and momentum and even quality/defensive (due to the lottery effect which exists across asset classes). But beta exposure also can be in some bonds that have equity like characteristics. So corporate bonds have some beta exposure and the lower the credit quality the higher the loading on beta will be. For AAA it's close to zero but for pure junk it might be 50% or more.

Second, with that said, yes I do think it's helpful to think about diversifying across factors--remember that even the traditional AA with equities was about factors once you got beyond TSM. So you can keep the traditional AA with the rebalancing table while targeting exposure to certain factors while constructing the portfolio.

Third, doesn't have to get that complicated as at least with equities you get much of the diversification benefit from just adding size and value and there is a diminishing marginal utility of benefits as you add other factors (there is appendix in Your Complete Guide to Factor Based Investing on this subject). Can get some added benefits if value funds you own also screen out negative momentum, and that will also reduce the risk of that dreaded tracking error risk disease. Then if desire you can add other unique sources of risk as well as I have done with the two Stone Ridge products I own (about 10% of my portfolio and would be more if had more tax advantaged space), alternative lending and reinsurance. And then if want can add fund like QSPRX for some further diversification benefits.

Basically my view is that given all crystal balls are cloudy the best strategy is to diversify as much as possible where you have unique sources of risk and return, with low to negative correlations, that meet the criteria established in my book of being persistent, pervasive, robust, implementable and intuitive (so you can have a strong belief that the premiums are LIKELY to persist).

I hope that is helpful

Larry

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Re: David Swensen says "never have anything weighted more than 30%"

Postby Call_Me_Op » Tue Dec 27, 2016 11:26 am

My question is how does he define "anything?"
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Re: David Swensen says "never have anything weighted more than 30%"

Postby btenny » Tue Dec 27, 2016 12:18 pm

Roger Gibson talks about doing this but calls it asset allocation. I found his book back when I first took over my stock investing stuff. I did this before I found Bogleheads. I have done sort of this 30% or less in any one asset type ever since 2003ish. It has worked very well for me. No big drops but also not quite as much return as more simple approaches. Or that is what I have experienced in 13 years. I have about 30% in investment grade bonds and cash and 20% or so in munis and 10% or so in TIPs. I do similar diversification into US stocks and international stocks and reits and commodities (XOM).

The big disadvantage I see is the complexity of managing this portfolio over 2-3 accounts to make this work well. I know I am seriously thinking about going to a 3-4 fund portfolio as I get older to make it easy for my wife to manage if something should happen to me.

Good Luck.

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Re: David Swensen says "never have anything weighted more than 30%"

Postby TdF fan » Tue Dec 27, 2016 12:51 pm

juanovo wrote:TdF,

I wonder if you'd run the portfolio again with long bonds instead of intermediate bonds and once more with a bond barbell of long bonds and short term bonds. It is my reading of Unconventional Success that he originally recommended long bonds and then clarified that the bond allocation should match the duration of intermediate term fund or the total bond market overall. It is my understanding that he recommended the long bonds because they have historically were not correlated (not inveresly correlated) with stocks. I believe others have suggested long bonds as a counter balance to high equity allocations as well. I think he is not very excited about REITS and much prefers TIAA Real Estate for its direct ownership structure.

I think the interesting part about nisiprius's critique is that indeed there is little likelihood of one factor or asset zagging when the other zigs, of course it happens and bonds certainly act as a ballast. At the same time Swensen recommends any need under 2-10 years end up in near cash so now you know what the "long run" is and how long you'll be expected to wait it out before something recovers. I appreciate that aspect of Swensen's advice.


I ran the portfolio with long bonds and another run with a barbell approach. The long bond portfolio did a little better than the one with intermediates, but basically the curve was the same (it "sank" too). During that same period, TIAA Real Estate declined about 40% and came back about 30%, so it would have smoothed out the curve a bit (over using REITS), but not enough to keep it from sinking.

So nisiprius is correct and I was wrong. I've reread sections of Swensen's book and his point (as I understand it) isn't that diversification will keep a portfolio from sinking, but it will 1) provide higher returns for a given level of risk and 2) may (perhaps) keep investors from making the wrong moves at the wrong time when their portfolios are under pressure.

A thank you to nisi for questioning and helping my understanding.

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Re: David Swensen says "never have anything weighted more than 30%"

Postby grok87 » Tue Dec 27, 2016 5:07 pm

neomutiny06 wrote:
grok87 wrote:
neomutiny06 wrote:
grok87 wrote:Good discussion.

Having read his "Unconventional Success" and been heavily influenced by it, my view is that he DOES intend the quoted advice for all investors.

But again, context is important. The context here is that this is meant to be one's "long term" portfolio. By that he means for investing with a horizon of 10 years or greater. In the book (as later modified) he states the following approach for time horizon:

10 years or more: Long term portfolio: Basically 30% US Stocks, 25% International Stocks, 15% Real Estate, 15% Treasuries, 15% TIPs
2 years or less: 100% cash

years in between: interpolate. For example with a 8 year horizon you would be 75% in the Long Term Portfolio and 25% in cash
so 22.5% US Stocks, 18.75% International Stocks, 11.25% Real Estate, 11.25% Treasuries, 11.25% TIPs, 25% Cash


That's what I figured. He does intend for that to be a rule for all investors to properly diversify. However, if one is 80% stocks, and does not want to use a REIT fund, how is it possible to be 30% or under in either US or Foreign stocks?

Well i think he would tell you not to do that.

By the way in the book, he doesn't come off as super excited about reits. He's more in favor of direct real estate i think like the tiAa real estate fund.

If you eliminate reits, i imagine he might say to up the treasuries and tips?
So 30 us stocks, 30 intl stocks, 20 treasuries, 20 tips.

He's generally in favor of broad diversificAtion among assets that are intrinsicAlly different from each other. In other words where there is an intrinsic reason to believe the assets will perform differently than each other. As opposed to assets that have happened to perform differently in recent times by chance.


So you believe even for a young person, Swensen would advise a balanced portfolio with a large amount of bonds?

Well if you are asking would he still recommend 70/30 for a young person?- yes I think he would. He calls such an allocation "equity-oriented".
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Re: David Swensen says "never have anything weighted more than 30%"

Postby mickeyd » Tue Dec 27, 2016 7:09 pm

OK, here is the reason that this does not make sense
reading Tony Robbins "Master The Game"
. Since when does Tony Robbins give out good investment advice or properly quote others? Swensen may have said it, but there is more to the story...
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Re: David Swensen says "never have anything weighted more than 30%"

Postby juanovo » Tue Dec 27, 2016 9:30 pm

TdF. Yes I am not surprised that the portfolio never sank. I don't believe such a portfolio exists. As in diversification doesn't mean guarantee inverse correlation or the portfolio never sinking. On Nisi is usually right. If I were to go back and start over I would probably go with a three fund portfolio. But I had already gone down the Swensen slice and dice when I became aware of bogleheads and stuck with it. It seems to have served me well. Especially thanks to advice from folks like from who seem to be know a good deal about Swensen's approach.

Thanks for looking at the long bonds, barbell and TIAA REIT examples.


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