The Investment Scientist

David Swensen’s asset allocation for retail investors

Posted on: October 27, 2008

In his book “Unconventional Success: A Fundamental Approach to Personal Investing,” David Swensen prescribes for retail investors an asset allocation markedly different from his management of Yale Endowment.

  • Domestic Equity (30 percent) – Stocks in U.S.-based companies listed on U.S. exchanges.
  • Emerging Market Equity (5 percent) – Stocks from emerging markets across the globe. Brazil, Russia, India, China, etc.
  • Foreign Developed Equity (15 percent) – Stocks listed on major foreign markets in developed countries, such as the UK, Germany, France, and Japan.
  • REITs or Real Estate Investment Trusts (20 percent) – Stocks of companies that invest directly in real estate through ownership of property.
  • U.S. Treasury Notes and Bonds (15 percent) – These are fixed-interest U.S. government debt securities that mature in more than one year. Notes and bonds pay interest semi-annually. The income is only taxed at the federal level.
  • TIPs or U.S. Treasury Inflation-Protection Securities (15 percent) – These are special types of Treasury notes that offer protection from inflation, as measured by the Consumer Price Index. They pay interest every six months and the principal when the security matures.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

[5/15/2013 comment] I revisited this article five years later. Assuming you hired me to apply David Swensen’s asset allocation after reading my article, how much money you would have made if you have an initial amount of $1mm.

I would have used Vanguard and DFA funds to implement the Swensen allocation. Here is why. I would have DFQTX for domestic equity, DFTWX for emerging and foreign developed market, DFREX for real estate, VBMFX for US treasuries and Bonds and DIPSX for US treasures inflation-protected securities. I choose them because they invest in the entire asset class and they have extremely low expense ratios. Here are their total returns from 11/2008 to 5/15/2013 (four and a half years.)

DFQTX 105%

DFTWX 81%

DFREX 124%

VBMFX 31%

DIPSX 48%

The total value of the portfolio today would be $1.84mm. You would have made $840k in profit. For four and a half year, that’s not too shabby!

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

1 Response to "David Swensen’s asset allocation for retail investors"

Reblogged this on The Investment Fiduciary and commented:

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



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