Would David Swensen's advice be different if he wrote his book in 2017?

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simplesauce
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Would David Swensen's advice be different if he wrote his book in 2017?

Post by simplesauce » Wed Nov 01, 2017 9:04 pm

I am a big fan of Unconventional Success. Great book.

However, on the bond side, I would like to know if anyone thinks David Swensen's advice to hold 50% Treasuries and 50% TIPS would be different if he had written the book more recently? The interest rates when he gave this advice were quite higher. We are now in a period of financial repression, and who knows if or when it will change. What are your thoughts?

In normal times, I love the 50% Treasuries, 50% TIPS bond portfolio. Extremely safe and intuitive. But these days, it is a little harder to champion.

AlohaJoe
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Re: Would David Swensen's advice be different if he wrote his book in 2017?

Post by AlohaJoe » Wed Nov 01, 2017 9:22 pm

In 2005 Treasuries had a nominal yield of 4.2%. Inflation was 3.4%. So the real yield was 0.8%.

Today Treasuries have a nominal yield of 2.3%. Inflation is 1.7%. So the real yield is 0.6%.

It seems to me that yields now are almost exactly the same as when Swensen's book came out 10 years ago so I'm not sure why he'd change his advice. I doubt a 0.2% change in real yields would (or should) affect his advice dramatically.

Real yield matters, not nominal yields, right?

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dodecahedron
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Re: Would David Swensen's advice be different if he wrote his book in 2017?

Post by dodecahedron » Wed Nov 01, 2017 9:34 pm

AlohaJoe wrote:
Wed Nov 01, 2017 9:22 pm
In 2005 Treasuries had a nominal yield of 4.2%. Inflation was 3.4%. So the real yield was 0.8%.

Today Treasuries have a nominal yield of 2.3%. Inflation is 1.7%. So the real yield is 0.6%.

It seems to me that yields now are almost exactly the same as when Swensen's book came out 10 years ago so I'm not sure why he'd change his advice. I doubt a 0.2% change in real yields would (or should) affect his advice dramatically.

Real yield matters, not nominal yields, right?
Since taxes are based on nominal yield, real after tax yields were actually negative for anyone in the 25% or higher tax bracket in 2005, whereas they are (slightly) positive for someone in the 25% bracket now. So real aftertax yields are actually slightly up for many folks, rather than down as asserted by the OP.

Bottom line: I agree with AlohaJoe that a decrease in nominal (pretax) Treasury yields is unlikely to be a factor in changing advice.
simplesauce wrote:
Wed Nov 01, 2017 9:04 pm
In normal times, I love the 50% Treasuries, 50% TIPS bond portfolio. Extremely safe and intuitive. But these days, it is a little harder to champion.
In those so-called "normal" times the OP referred to, with higher inflation and higher nominal interest rates, real aftertax yields were negative for both Treasuries and TIPS for anyone in a 25% or higher tax bracket.

Greg in Idaho
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Re: Would David Swensen's advice be different if he wrote his book in 2017?

Post by Greg in Idaho » Fri Nov 03, 2017 9:09 am

I thought you might take this in the direction of questioning rebalancing as a strategy...McClung's recent book uses rebalancing as a standard for common, but low performing strategies, compared to a number of alternatives he explores (most I think developed based on analyses since Unconventional Success...

Boston Barry
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Re: Would David Swensen's advice be different if he wrote his book in 2017?

Post by Boston Barry » Fri Nov 03, 2017 9:35 am

When reading the title I was also thinking about a different question, namely what he would recommend for REIT allocation 2005 (20%) vs 2012 (15%) vs current day...

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watchnerd
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Re: Would David Swensen's advice be different if he wrote his book in 2017?

Post by watchnerd » Sun Sep 23, 2018 11:35 am

simplesauce wrote:
Wed Nov 01, 2017 9:04 pm
We are now in a period of financial repression, and who knows if or when it will change. What are your thoughts?
What do you mean by financial repression?
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

Valuethinker
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Re: Would David Swensen's advice be different if he wrote his book in 2017?

Post by Valuethinker » Sun Sep 23, 2018 12:11 pm

watchnerd wrote:
Sun Sep 23, 2018 11:35 am
simplesauce wrote:
Wed Nov 01, 2017 9:04 pm
We are now in a period of financial repression, and who knows if or when it will change. What are your thoughts?
What do you mean by financial repression?
It's a term used to characterize monetary policy since the Great Financial Crash, where interest rates were held below their "normal" level in a bid to increase economic growth. The connection is to the period post WW2, when interest rates were controlled, and also, deliberately (I believe i have not studied the period) held to less than the inflation rate to reduce the debt drag on the economy of the very large wartime debts incurred by the US government.

Its use opens up a number of highly debatable questions/ assumptions:

- what is the "Normal" rate of interest in a world of Central Banking? How would we determine it? Since the Central Bank has to set an interest rate, it's hard to determine what "normal" is - as other interest rates are the result of market activity around that rate

- if US nominal rates were very low, but real rates were actually not super low by historic levels (albeit very much at the low end), due to very low inflation (the US actually hit deflation at one point post 2008) was that financial repression? Is it possible that the correct monetary policy would have been to run *negative* interest rates? That's certainly what the Japanese, Swiss and European Central Banks have tried subsequently (by charging interest rather than crediting it on deposits left with them by other banks - German government bonds were running at negative nominal yields, suggesting extreme risk aversion in the Eurozone).

- is it also possible that government bond yields have been very low not because of Central Bank policy, but simply because investors found few other good homes for their money? I.e. that the world was suffering from an oversupply of savings in an environment of extreme risk aversion (first the GFC, then the Eurozone Crisis 2010+)

- Japan has been in a world of near zero nominal interest rates, and deflation, for nearly 30 years. Does this have something to say about the difficulties of "repressing" interest rates in a low demand low growth world?

- US interest rates have been rising and the reduction of Quantitative Easing is taking place. So can we still characterize this as being in "Financial Repression"? Certainly from the comments of the US Administration they do not believe this is helpful in terms of economic growth -- they have criticized the Fed for these actions

In essence "financial repression" has a negative connotation. And it's not clear that is appropriate, given the US had the weakest economic recovery of the postwar years. Things are going well now, but it has taken 10 years to get there. Arguably the US is now getting close to full employment - however employment 25-64 (ie among groups that would normally be employed) is still below 2000 level, suggesting there is still slack in the labour market.

dkturner
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Re: Would David Swensen's advice be different if he wrote his book in 2017?

Post by dkturner » Mon Sep 24, 2018 8:09 am

Swensen’s model portfolio allocates only 30% of principal to fixed income, which is a pretty low allocation for the average investor. With a low fixed income allocation the quality of the fixed income becomes very important. That certainly points one in the direction of U.S. Treasury securities, so I doubt he would do it any differently today.

aristotelian
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Re: Would David Swensen's advice be different if he wrote his book in 2017?

Post by aristotelian » Mon Sep 24, 2018 8:11 am

Bonds are for defense, not offense. If you hold short to intermediate term, there is not nearly as much downside risk. You get return from stocks.

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watchnerd
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Re: Would David Swensen's advice be different if he wrote his book in 2017?

Post by watchnerd » Mon Sep 24, 2018 10:21 am

dkturner wrote:
Mon Sep 24, 2018 8:09 am
Swensen’s model portfolio allocates only 30% of principal to fixed income, which is a pretty low allocation for the average investor. With a low fixed income allocation the quality of the fixed income becomes very important. That certainly points one in the direction of U.S. Treasury securities, so I doubt he would do it any differently today.
What I find a bit surprising how many investment advisors that Bogleheads tend to like (Bernstein, Swedroe, Swensen) advocate Treasuries, yet the Boglehead default seems to be to advise to hold TBM.

Full disclosure, I hold intermediate Treasuries for my "stock insurance" bond allocation, considering moving to a cap-weighted Treasury index.
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

pascalwager
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Re: Would David Swensen's advice be different if he wrote his book in 2017?

Post by pascalwager » Sat Sep 29, 2018 12:41 am

dkturner wrote:
Mon Sep 24, 2018 8:09 am
Swensen’s model portfolio allocates only 30% of principal to fixed income, which is a pretty low allocation for the average investor. With a low fixed income allocation the quality of the fixed income becomes very important. That certainly points one in the direction of U.S. Treasury securities, so I doubt he would do it any differently today.
But he advises to begin gradually selling your portfolio ten years before reaching your time horizon until you end up at 100% cash as you reach your time horizon.

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