Keeping portfolios simple while providing global diversification is one of the goals for ITA investors. One investing model to accomplish this is what I call the “Swensen Six” portfolio, named after David Swensen, author of Unconventional Success. In his book, Swensen lays out compelling arguments for this six asset class portfolio. The six asset classes capture returns of positive markets, provide for inflation protection, work quite well in down markets, require almost no management skills, and can be purchased at zero cost to the investor. It does not get much better than this.
Swensen Six Recommendation: If you are a Vanguard client, here are the recommendations this Monday morning of 8/5/2019. Before examining the current recommendations, check out this Seeking Alpha article on the “Swensen Six” for Vanguard investors. With inflation quite low, I exchanged a bond fund for a TIPs ETF. This shows up in the following screenshot. The screenshots are worksheets within the Kipling momentum spreadsheet or workbook.
The LRPC model recommends buying VTI, VNQ and TLT when the Maximum Number of Assets is set to three (3). The number 3 is selected based on the back-testing provided by Herbert Haynes. More on the results below.
If the BHS model is selected, the recommendations shift to TLT and AGG or what I refer to as a capital preservation position. VTI and VNQ are not recommended by the BHS model. Keep in mind that there are three options within the Kipling to manage a portfolio. These three models are undergoing testing via the Carson portfolios.
In this worksheet we see 1/3 of the portfolio is invested in each of the three recommended portfolios. The Top Rank Only (TRO) is set to No.
Swensen Six Recommendations for Schwab Clients: If you are a Schwab client, here are the recommendations. Note the slight difference. With the Schwab low-cost ETFs the recommendation is to purchase SCHB, SPTL, and SCHZ. REITs (SCHH) are not recommended. Instead, the aggregate bond (SCHZ) is recommended for purchase.
If I select the BHS model, the recommendation is to Hold SCHB and to buy SPTL and SCHZ. Not much difference between the LRPC and BHS recommendations. If you are a TDAmeritrade client, the ETFs vary, but the asset classes remain the same.
Performance Data Since 12/29/2006: I recently asked Herb Haynes to apply his back-testing program to the “Swensen Six” portfolio. The portfolio is simple, well diversified, and it includes ETFs that work well during market down-turns as well as periods of high inflation. Should inflation raise its ugly head, we could add STIP or TIP to the portfolio investment quiver. I asked Herb to primarily use Vanguard ETFs as they have a history that incorporates the Great Recession. A few of the commission free ETFs available through Schwab and/or TDAmeritrade do not have sufficiently long histories to include the Great Recession of 2008.
With the Model set to LRPC and Top Rank Only (TRO) set to No, here is data for the different number of assets. The initial investment is $100,000 and the portfolio is rebalanced every 33 calendar days. Again, the portfolio is launched at the end of 2006 and runs through 7/31/2019.
- 1 Asset: $245,132
- 2 Assets: $348,365
- 3 Assets: $402,304
- 4 Assets: $335,963
- 5 Assets: $317,723
- 6 Assets: $320,629
- VTTVX Benchmark: $202,712
Conclusion: With these six ETFs it is best to select 2, 3, or 4 assets when rebalancing every 33 days and the model set to LRPC.
BHS Model: Months ago there was discussion as to when is it best to rebalance the portfolio. Since I track so many portfolios I’ve been rebalancing every 33 days so as to spread the updates throughout the month. Haynes data is telling a different story. Using the same “Swensen Six” portfolio and rebalancing at the End-Of-Month (EOM), here are the results for a $100,000 portfolio launched at the end of 2006. Only 2, 3, and 4 are used for the maximum number of ETFs.
- 2 Assets: $447,211 compared to $224,797 when rebalanced every 33 days.
- 3 Assets: $454,946 compared to $252,599 when rebalanced every 33 days.
- 4 Assets: $384,848 compared to $235,501 when rebalanced every 33 days.
It is not easy to account for the significant differences when using the BHS model, and when to rebalance. If you are managing one or two portfolios using a few ETFs as we have with the “Swensen Six,” use the BHS model within the Kipling workbook and rebalance at the end of the month.