Financially reviewed by Patrick Flood, CFA.
The David Swensen Portfolio, as the name implies, is based on David Swensen’s management of the Yale endowment fund. Here we’ll take a look at its components, performance, and the best ETF’s to use in its construction.
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What Is the David Swensen Portfolio?
The David Swensen Portfolio – also called the David Swensen Lazy Portfolio – comes from portfolio manager David Swensen, who was the CIO at Yale University from 1985 until his death in May, 2021. You can get his book Unconventional Success: A Fundamental Approach to Personal Investment on Amazon here, which details how retail investors can use the portfolio outlined below to mirror the Yale Model, though note that the specific portfolio Swensen used for the Yale endowment is not exactly the same as the Swensen portfolio below because he was able to use somewhat “exotic” products only available to institutional investors like private equity, hedge funds, venture capital, etc.
The David Swensen Portfolio asset allocation looks like this:
- 30% Total Stock Market
- 15% International Stock Market
- 5% Emerging Markets
- 15% Intermediate Treasury Bonds
- 15% TIPS
- 20% REITs
Similar to the Ivy Portfolio, we see a heavy 20% allocation to REITs. Unlike that one though, the Swensen Portfolio doesn’t include commodities, and I like that. I also like that this portfolio does not use gold.
Swensen had a particular affinity for TIPS, or Treasury Inflation Protected Securities, a relatively new type of treasury bond indexed to the CPI, the common measure of inflation. This is interesting, as most lazy portfolios ignore TIPS altogether or give them a smaller allocation. Rick Ferri is fond of TIPS as well, suggesting that retirees should probably have them as half of their fixed income allocation.
In this sense, the Swensen Portfolio is not unlike the famous All Weather Portfolio, attempting to sail through different economic environments unscathed, though Dalio uses gold and broad commodities as an attempt at inflation protection instead of TIPS. In fairness, TIPS weren’t even around yet when Dalio first proposed the All Weather Portfolio’s components.
I also agree with Swensen’s use of treasury bonds and exclusion of corporate bonds. He maintained, like I do, that treasury bonds offer superior downside protection alongside stocks, and corporate bonds don’t sufficiently compensate the investor for their extra risk. That said, 15% in intermediate treasuries is not really going to provide much protection. I think it would probably be more sensible to make them long bonds instead of intermediate.
Furthermore, TIPS and intermediate bonds are likely unsuitable, unnecessary, and almost certainly suboptimal for the young investor with a long time horizon and high tolerance for risk. In my opinion, this portfolio is better suited for retirees and those approaching retirement, but at that point I’d also want to increase the bonds.
The Swensen portfolio relies heavily on REITs, having them comprise 20% of the total portfolio. This seems a bit odd to me, as we now know REITs are not a distinct asset class, are not a reliable inflation hedge, and don’t offer much of a diversification benefit. Moreover, their returns seem to be explained by exposure to the Size, Value, and Credit factor premia, thus they can be replicated with small cap value stocks and lower-credit bonds. I don’t have a problem with 10% or so in REITs, but 20% seems like too much in my opinion when that valuable space could be given to stocks or bonds.
David Swensen Portfolio Performance
For the period 1997 through May, 2021, the David Swensen Portfolio and the S&P 500 have been pretty close from a pure returns perspective, with the former obviously having a higher risk-adjusted return (Sharpe) due to its lower volatility:
David Swensen Portfolio ETF Pie for M1 Finance
M1 Finance is a great choice of broker to implement the David Swensen Portfolio because it makes regular rebalancing seamless and easy, has zero transaction fees, and incorporates dynamic rebalancing for new deposits. I wrote a comprehensive review of M1 Finance here.
Utilizing mostly low-cost Vanguard funds, we can construct the David Swensen Portfolio pie with the following ETF’s:
- VTI – 30%
- VXUS – 15%
- VWO – 5%
- VGIT – 15%
- SCHP – 15%
- VNQ – 20%
You can add the David Swensen Portfolio pie to your portfolio on M1 Finance by clicking this link and then clicking “Add to Portfolio.”
Disclosures: I am long VWO in my own portfolio.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.