As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

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SQ17
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As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by SQ17 »

https://www.bloomberg.com/opinion/artic ... f=2o0rZsF1

I've subscribed the bogleheads theory as it is logical to me however I came across the above article recently and I'm curious on thoughts from those who are more experienced bogleheads.

It mainly cites the Yale model and argues the following:

"Second, forget passive index investing. The Yale Model puts heavy focus on alternative assets such as private equity and real estate. The fund targets 17.5% and 23.5% of its money at leverage buyouts and venture capital, well above its peers’ average 8.4% and 7.7% allocation. The endowment fund likes real estate, calling it a “natural hedge” against unanticipated inflation. The fund aims 9.5% of its money into that sector, versus the street’s average 3.6% allocation."

"In a zero-inflation world, investing was almost a no-brainer. You simply put your money in the S&P 500 Index. But the calculus changes if consumer prices tick up. When core inflation ranges between 3% and 6%, stocks — even value-oriented ones — lose their allure. If history is a guide, real assets — oil, base metals and agricultural products — will become the stars. But the middle class may have a hard time investing in natural resources. After all, you can’t stockpile corn or natural gas in your backyard.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by fabdog »

It's an interesting article with no practical application to real world individual investors. It talks about the wonderful things Yale invests in, and then notes that most of these are not available to individual investors (at least not those of modest means). It also doesn't make clear the time mismatch between Yale (ongoing into perpetuity) and folks trying to get a nest egg together over 30-40 years

You and I can likely find a private equity or hedge fund investment (maybe thru a fund of funds) Will it be of the caliber of what Yale gets access to? No.
They then go on to say well create your own by investing in local small businesses and real estate.

What would you differently based on having read this article?

Mike
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by dbr »

Yep, that 100,000 acres with mineral rights I own over the Hugoton gas dome is going to be my source of income. For you and your back yard, I am not so sure. I owned a hundred acres or so of farmland that was turned over to timber with a tax benefit. After another fifty years or so some money might have been earned on that but selling the place off as life happened was a better choice.

But, joking aside, I really did hold "shares of beneficent interest" in a trust with assets in the Hugoton dome and they paid a handsome 10% on price of shares until the reserves that trust held were exhausted and then the payments and the shares evaporated. But it was ok for many years. I did not relish having to file a separate return on Kansas income, but it was 10% for a long timer and you can actually drive over and stand on top of the asset.

On this board there is a fair share of investment real estate holders. In my opinion that is a business, a reasonable one, or, for some people, a failed one. That is up to the individual.

I think most of us have no business in private equity ventures. Probably the rule there is if you don't know you are one of those people who can do that, then you aren't one of those people.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by ruralavalon »

Bloomberg wrote:But the middle class may have a hard time investing in natural resources. After all, you can’t stockpile corn or natural gas in your backyard.
. . . . .
Private equity is a rich man’s club. . . .
For real estate, stick with something like Vanguard Real Estate Index Fund Admiral Shares (VGSLX) to augment your broadly diversified total stock stock market or S&P 500 index fund.

Owning real estate is not just investing. It is a job, which is sometimes very time consuming and difficult. It's not for everyone.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by livesoft »

dbr wrote: Mon May 17, 2021 8:42 am Yep, that 100,000 acres with mineral rights I own over the Hugoton gas dome is going to be my source of income.
Ha! My neighbor does actually own some salt domes which are leased to companies to store gas. They've been in their family for years and years.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by dbr »

livesoft wrote: Mon May 17, 2021 11:07 am
dbr wrote: Mon May 17, 2021 8:42 am Yep, that 100,000 acres with mineral rights I own over the Hugoton gas dome is going to be my source of income.
Ha! My neighbor does actually own some salt domes which are leased to companies to store gas. They've been in their family for years and years.
Good one.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by TN_Boy »

fabdog wrote: Mon May 17, 2021 8:37 am It's an interesting article with no practical application to real world individual investors. It talks about the wonderful things Yale invests in, and then notes that most of these are not available to individual investors (at least not those of modest means). It also doesn't make clear the time mismatch between Yale (ongoing into perpetuity) and folks trying to get a nest egg together over 30-40 years

You and I can likely find a private equity or hedge fund investment (maybe thru a fund of funds) Will it be of the caliber of what Yale gets access to? No.
They then go on to say well create your own by investing in local small businesses and real estate.

What would you differently based on having read this article?

Mike
In fact, David Swensen, who ran the Yale endowment, wrote two books.

One was for the institutional investor (other large university endowments, pension funds, etc) and describes the Yale investment approach and why he thought it was superior for Yale.

The other was for the individual investor. In that book, he said, in so many words, that individual investors cannot and should not invest like Yale does. He recommends, no, strongly recommends, passive indexing.

Both books are interesting, but anybody describing the Yale model and then saying individuals should do the same thing is ignoring what the guy who actually ran the Yale money thought.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by nisiprius »

Meaningless jangly emotive associations around the name Yale. What does funding student tuition at Yale have in common with Yale funding its own endowment, other than faint echoes of :moneybag :moneybag :moneybag and money-green = Ivy green?

Point #1: The article is talking about short and medium-term college savings and argues you should not use a retirement savings models. But one of the whole points of the Yale model is that college endowments have a longer time horizon than an individual investor. Yale can tolerate illiquid investments that may take decades to pay off, and certainly cannot be counted on to pay off at any particular time.

She suggests over and over that you seek to earn a "liquidity premium." You are going to put money into things that pay off at irregular dates in the distant future, as a way to meet eight tuition bills that are going to come due on specific dates. You are will get one of those bills in, say, fall of 2035. Are you going to ask the Yale bursar to wait a few years because timber prices are down?

If the retirement saving model isn't appropriate for college savings, then the Yale model is less appropriate.

Point #2: After talking about what Yale invests in, much of which are unavailable to an ordinary "mass affluent" investor, the writer then goes on to say:
  • after telling us how great private equity is, you can't invest in it any way. So why bother telling us what a great inflation hedge it is?
  • You can "tap into" real estate? A couple of rental houses in one city are comparable to diversifed holdings of hundreds of commercial real estate properties?
  • Investing in small businesses run by family and friends is the same thing as venture capital.
This is plumb loco. Shuli Ren does not give us any statistics on the risk and return of investing in small businesses run by family and friends.

Point #3: Swensen IMHO was innovative, remarkably successful, possibly a genius. However, it has been widely noted that although he was able to obtain stellar results for Yale, other university endowments have not been able to replicate his success by following seemingly similar strategies: Ivy League endowments underperform 60/40 portfolio again.

If Dartmouth, Harvard, Yale, Princeton, Columbia, the University of Pennsylvania and Cornell failed to match a 60/40 portfolio by following the "Yale model," what makes you think you can do any better, using ownership in a sister-in-law's nail salon as your private equity?

But you can be virtually certain of performing as well as a 60/40 portfolio simply by buying the Vanguard Balanced Index Fund.

The kindest thing I can say about this article is that you will find many discussions in the forum about whether to supplement a standard Boglehead portfolio by adding an allocation to a REIT fund, such as the Vanguard REIT Index Fund. But of course that's just a kind of stock, not direct ownership of commercial real estate. If you happen to be a college professor at--let's keep the silly theme going--Yale, then you may have access to the TIAA Real Estate fund, which actually does represent direct ownership of commercial real estate.
Last edited by nisiprius on Mon May 17, 2021 1:55 pm, edited 8 times in total.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by LadyGeek »

This thread is now in the Investing - Theory, News & General forum (general discussion).
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by Onlineid3089 »

I don't know that the goals align very well between the Yale endowment fund with $31.2 billion per google, and the average retail investor. What is even the minimum buy in price for some of these great investments?
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by dbr »

Onlineid3089 wrote: Mon May 17, 2021 1:30 pm I don't know that the goals align very well between the Yale endowment fund with $31.2 billion per google, and the average retail investor. What is even the minimum buy in price for some of these great investments?
Exactly, but there is a deal going . . .

. . . for you only, today only, $31.2B. :sharebeer
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by nisiprius »

One last thought. Vanguard has a curious fund, currently known as the Vanguard Managed Allocation Fund, VPGDX. It is actively managed. I don't want to get into its history, but all along it has been described by the financial press, in the forum, and at least once by Vanguard itself as being "endowment-like:" Vanguard Announces Changes to Managed Payout Fund
“Vanguard Managed Allocation Fund provides investors with a sophisticated, actively-managed, endowment-like portfolio at a low cost,” said Matt Brancato, head of Vanguard’s Portfolio Review Department.
Is this really like the Yale model? I don't want to go down that rabbit hole.

But what I will do is to compare its record, since inception, with the Vanguard LifeStrategy Moderate Growth fund and the Vanguard Balanced Index Fund. Balanced index is a pure-passive 60/40 fund, but the "problem" with the comparison is that it's US only, which over the time period shown gives it an unfair advantage over funds with international stock allocation. LifeStrategy Moderate is not endowment-like and holds four total market index funds: US stock, international stock, US bonds, and international bonds.

Source

Image

As you can see, the "endowment-like" Managed Allocation Fund underperformed the others. Furthermore, the measures of fluctuation and risk, StDev and Max drawdown, were larger. That means that the fund would be slightly less reliable if needed to meet tuition payments on specific dates.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by NiceUnparticularMan »

In short, if you have $30 billion, can hire a team of loyal PhDs to manage your investments, and are investing for perpetuity, feel free to follow the Yale Model.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by goblue100 »

Maybe Yale is special, but most other pension funds, at least in Texas can't beat a simple Vanguard fund.
https://www.dallasnews.com/business/per ... ndex-fund/

"Texas has 99 public pension funds. All are managed by professionals. Those professionals are devoted to providing superior management, and they are paid well to do it.

Very well.

Yet over the last 10-year reporting periods, only three of the 96 pension funds with 10-year performance figures managed to beat the Vanguard Balanced Index mutual fund (Admiral shares)."

I think I know where I'm going to place my bet.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by Dennisl »

Article can say whatever it wants. Take a look at the data for passive w active investing. Did it get easier for the active guys with passive investing? No. Read the incredible shrinking alpha. Look at the data for someone with a active vs passive index portfolio. The overall passive portfolio usually outperforms. Why do active funds not performs as well in a class that is killing it, although may take less loss in one that is doing poorly? Style drift - read about Dunn's Law.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by struva »

If Yale or Harvard or other schools really had some secret sauce or unique investment powers, wouldn't it make sense for them to create some sort of investment product that allowed outsiders to participate (and could increase their leverage)? Sort of like a Berkshire Hathaway or an ETF that mimic'ed their asset allocation and investment approach. Whatever part of their approach that could be commoditized or replicated by individual investors should already have happened in an efficient financial market.

I have always wondered how much of their high endowment returns have depended on taking advantage of their ability to hold prime real estate without paying taxes on it by claiming it has educational purpose. That would be hard for me to replicate.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by bogledogle »

Here's a nice video from Ben Felix on "Endowment models" that mentions Yale's fund.

https://youtu.be/pMxYYYZ04nc
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by GaryA505 »

And then there's Stephen Edmundson, who manages the Nevada PERS fund and invests in mostly index funds.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by DNeal »

ruralavalon wrote: Mon May 17, 2021 10:58 am
Bloomberg wrote:But the middle class may have a hard time investing in natural resources. After all, you can’t stockpile corn or natural gas in your backyard.
. . . . .
Private equity is a rich man’s club. . . .
For real estate, stick with something like Vanguard Real Estate Index Fund Admiral Shares (VGSLX) to augment your broadly diversified total stock stock market or S&P 500 index fund.

Owning real estate is not just investing. It is a job, which is sometimes very time consuming and difficult. It's not for everyone.
I brought a bunch of shares Vanguard Real Estate Index Fund Admiral Shares (VGSLX) in 2007. I took me eight year to get back to even. Stick with VTI /VTSAX. it is about 3.4 % Real Estate.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by Independent George »

bogledogle wrote: Mon May 17, 2021 6:01 pm Here's a nice video from Ben Felix on "Endowment models" that mentions Yale's fund.

https://youtu.be/pMxYYYZ04nc
Seconded. Ben Felix is one of the best financial YouTubers out there, and this video is no exception. He also addresses it about 31 minutes into his podcast here:

https://www.youtube.com/watch?v=qsJ9odanKvs
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by wolf359 »

TN_Boy wrote: Mon May 17, 2021 12:41 pm
fabdog wrote: Mon May 17, 2021 8:37 am It's an interesting article with no practical application to real world individual investors. It talks about the wonderful things Yale invests in, and then notes that most of these are not available to individual investors (at least not those of modest means). It also doesn't make clear the time mismatch between Yale (ongoing into perpetuity) and folks trying to get a nest egg together over 30-40 years

You and I can likely find a private equity or hedge fund investment (maybe thru a fund of funds) Will it be of the caliber of what Yale gets access to? No.
They then go on to say well create your own by investing in local small businesses and real estate.

What would you differently based on having read this article?

Mike
In fact, David Swensen, who ran the Yale endowment, wrote two books.

One was for the institutional investor (other large university endowments, pension funds, etc) and describes the Yale investment approach and why he thought it was superior for Yale.

The other was for the individual investor. In that book, he said, in so many words, that individual investors cannot and should not invest like Yale does. He recommends, no, strongly recommends, passive indexing.

Both books are interesting, but anybody describing the Yale model and then saying individuals should do the same thing is ignoring what the guy who actually ran the Yale money thought.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by rockstar »

The reality is that the common investor doesn't have access to the same investment choices as Yale. So you can't really mirror it.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by MJS »

GaryA505 wrote: Mon May 17, 2021 6:31 pm And then there's Stephen Edmundson, who manages the Nevada PERS fund and invests in mostly index funds.
Oooo! Nevada PERS is adding another investment manager to their staff! Going big time... https://www.ai-cio.com/news/nevada-pers ... t-officer/
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by nisiprius »

rockstar wrote: Mon May 17, 2021 8:24 pm The reality is that the common investor doesn't have access to the same investment choices as Yale. So you can't really mirror it.
The article says
the middle class... can invest in small businesses run by family and friends — which is akin to venture capital investing, offering a liquidity premium and growth options, the poor man’s private equity!
Going partners in your sister's nail salon isn't a perfectly good substitute for Yale's private equity?
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by heyyou »

Others should do whatever suits them.
I know that I don't know, so passive, index investing is more suitable for me.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by sureshoe »

The fundamental error of these type of articles is this assumption: that people can predict the future.

Let's say we know these facts:
1) Asset X will double if inflation doubles
2) Asset Y will cut in half if inflation doubles

So first off, people make these assumptions that Asset X is "oil" or "gold" or "bitcoins" or "corn" or "college" or whatever the heck they're selling. So I will GIVE them that and stop arguing about the asset. Alternatively, the article/seller assumes Asset Y will fail/flop (passive funds, etc). OK, I'll acknowledge that fact as well.

Of course, we can't REALLY know #1 and #2 are facts for any assets, but let's pretend we do.

The problem is we don't know when and if we're going to see inflation or when it will curb. In April 2020, were people sinking all their money in Oil while the economy was dying and everyone was starting to work from home? Because that's where you had to be to capitalize on that as an inflation hedge - and who was predicting mass inflation back in April 2020? By year end, it was up in the 50s and you missed most of the move before anyone was talking about inflation.

My point? Even if you know #1 and #2 above as FACTS (not a guarantee), Asset X will already have its "doubling potential" priced in before inflation occurs.

So all these people saying "get ready for inflation" is fine, but investing in "inflation protected funds" or whatever isn't going to "beat the market" with any alpha. It's a guess. They might win, they might lose - but either way, it's luck.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by NoRegret »

dbr wrote: Mon May 17, 2021 8:42 am Yep, that 100,000 acres with mineral rights I own over the Hugoton gas dome is going to be my source of income. For you and your back yard, I am not so sure. I owned a hundred acres or so of farmland that was turned over to timber with a tax benefit. After another fifty years or so some money might have been earned on that but selling the place off as life happened was a better choice.

But, joking aside, I really did hold "shares of beneficent interest" in a trust with assets in the Hugoton dome and they paid a handsome 10% on price of shares until the reserves that trust held were exhausted and then the payments and the shares evaporated. But it was ok for many years. I did not relish having to file a separate return on Kansas income, but it was 10% for a long timer and you can actually drive over and stand on top of the asset.

On this board there is a fair share of investment real estate holders. In my opinion that is a business, a reasonable one, or, for some people, a failed one. That is up to the individual.

I think most of us have no business in private equity ventures. Probably the rule there is if you don't know you are one of those people who can do that, then you aren't one of those people.
One can always buy KKR or BX. Both have outperformed VTI.
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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by CyclingDuo »

SQ17 wrote: Mon May 17, 2021 8:02 am https://www.bloomberg.com/opinion/artic ... f=2o0rZsF1

I've subscribed the bogleheads theory as it is logical to me however I came across the above article recently and I'm curious on thoughts from those who are more experienced bogleheads.
You can follow along with Swensen's recommended Yale U Unconventional Lazy Porftolio here:

https://logical-invest.com/app/portfoli ... -portfolio

The Swensen portfolio consists of six core asset class allocations:

US equity: 30%

Foreign developed equity: 15%

Emerging market equity: 5%

US REITS: 20%

US Treasury bonds: 15%

US TIPS: 15%


Or follow along at MarketWatch to see how it, along with the other 7 Lazy Portfolios are doing compared to the S&P 500 over the past year, 3 years, 5 years, and 10 years. This is from last Friday's close...

Image

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Re: As a newbie, genuinely interested to hear thoughts on this article which puts down passive index investing

Post by bondsr4me »

JonL wrote: Mon May 17, 2021 1:16 pm
SQ17 wrote: Mon May 17, 2021 8:02 am https://www.bloomberg.com/opinion/artic ... f=2o0rZsF1

Here's the second takeaway: When it comes to investing advice, be critical of the source of information. Do you think Bloomberg would get a lot of ad revenue from website visitors if the website repeated the same mantra about sticking with low-cost index funds? Unlikely. Site visitors would get the message, get bored, and move on. Bloomberg.com is in the entertainment business - not the sound-investing advice business.
+1

Totally agree….
It’s the same for CNBC, which I watch everyday, but only for company news/info.
They spend quite a bit of time talking about “trading”; just watch the noon hour broadcast.
Index investing is boring; which is not bad. I think it is the best way for most investors.
But it is bad for the TV shows; not exciting enough.

I invest in some stocks, but mostly VTI or VUG.

Have a great day….trading! (ha.ha…had to put that in for some excitement)

Don
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