ITA Wealth Management

  • Home
  • Blog
  • Guest Registration
  • Lifetime Member
  • Forum
  • Reset Password
  • Contact Me
  • About Me
You are here: Home / Beginning Investors / Revisiting The “Swensen Six” Portfolio

Revisiting The “Swensen Six” Portfolio

January 13, 2016 By Lowell Herr

Italy

Investors looking for a well-diversified and basic portfolio need look no further than the “Swensen Six.”  Both HedgeHunter and I’ve written about David Swensen’s simple portfolio before.  More references can be found by searching for Swensen on this blog.  Here is the “Swensen Six” portfolio in its most basic form where only six ETFs are used to cover the investing world.

  • U.S. Equities – VTI – 30%
  • Developed International Equities – VEA – 10%.  This was originally 15%, but was later reduced to 10% with the 5% excess now allocated to VWO.
  • Emerging Markets – VWO – 10%.  This was originally 5%.
  • U.S. Real Estate – VNQ – 20%
  • U.S. Treasury Bonds – TLT – 15%
  • U.S. Treasury Inflation Protected Securities – TIP – 15%

What is Swensen’s reasoning behind this portfolio?  While he does not specify the precise ETF tickers shown above, his asset allocation divisions are clearly spelled out in his book, Unconventional Success.  Here is his logic.  I am paraphrasing and the quoted material comes directly from Swensen’s book.

  1. “Basic financial principles require that long-term investment portfolios exhibit diversification and equity orientation.”
    • The above six ETFs accomplish both the goal of diversification and equity orientation.  VTI, VEA, VWO, and VNQ are all equity oriented ETFs.  Within the above six ETFs we are invested in hundreds of individual stocks from all over the globe.  Now that is diversification.
  2. “Diversification demands that each asset class receive a weighting large enough to matter, but small enough not to matter too much.”
    • The recommended percentages accomplish the weighting requirements.  A 30% weight is not so large as to matter too much and a 5% or 10% weight is sufficiently high to contribute to the portfolio well-being.
  3.  “Equity orientation requires that high expected return asset classes dominate the portfolio.”
    • VTI, VEA, and VWO accomplish this requirement as these equity ETFs are the principle drivers of portfolio return.
  4. “Investors give up expected return to defend portfolios against unanticipated inflationary or deflationary economic conditions.  U.S. Treasure Inflation-Protected Securities (TIP) protect against inflation with certainty, while real estate holdings guard against inflation with reasonable assurance.  … domestic equities add in the inflation-hedging characteristics of a portfolio, but in the short run domestic equities prove notoriously unreliable as inflation hedges.”

Just as Swensen altered the weights assigned to VEA and VWO in a paper published after his book was released, are there other tweaks one might introduce to the “Swensen Six?”  Yes, and here are two possible adjustments.

While Swensen recommends a 20% allocation to U.S. Real Estate (VNQ), one could further diversify by lowering the percentage to 15% and placing the remaining 5% in International Real Estate (RWX).  This keeps the percentage in REITs, but diversifies the portfolio even further.

The other minor change would be switch out TIP for a bond ETF, BIV or assign 10% to BIV and keep 5% in the TIPs.  BIV provides more income than TIP.

What is missing from this simple portfolio?  The one missing ingredient is not tied to the asset allocation model, but rather there is little protection in a down market as we experienced in 2008 and early 2009.  This requires the introduction of something like the momentum or ITA Risk Reduction models.

(Visited 410 times, 1 visits today)
facebookShare on Facebook
TwitterTweet
FollowFollow us
PinterestSave

Filed Under: Beginning Investors, Critical Material, Portfolio Construction Tagged With: Portfolio Construction

Meta Data

  • Log in
  • Entries feed
  • Comments feed
  • WordPress.org

Search

Recent Posts

  • Kepler Portfolio Review: 17 May 2022 May 17, 2022
  • Galileo Portfolio Review: 17 May 2022 May 17, 2022
  • Copernicus Portfolio Update: 14 May 2022 May 16, 2022
  • ITA Portfolio Performance Data: 14 May 2022 May 14, 2022
  • Rutherford Portfolio Review (Tranche 1): 13 May 2022 May 14, 2022
  • Bullish Percent Indicators: 14 May 2022 – Sector Buy Recommendations May 14, 2022
  • McClintock Portfolio Review: 13 May 2022 May 13, 2022

Recent Comments

  • Lowell Herr on Bullish Percent Indicators: 14 May 2022 – Sector Buy Recommendations
  • Lowell Herr on Bullish Percent Indicators: 14 May 2022 – Sector Buy Recommendations
  • jayaraman ramakrishnan on Bullish Percent Indicators: 14 May 2022 – Sector Buy Recommendations
  • Lowell Herr on Schrodinger Portfolio Review: 13 May 2022
  • HedgeHunter on Schrodinger Portfolio Review: 13 May 2022
  • HedgeHunter on Rutherford Portfolio Review (Tranche 5): 6 May 2022
  • HedgeHunter on Darwin Portfolio Review: 18 April 2022
  • Lowell Herr on Darwin Portfolio Review: 18 April 2022
  • Lowell Herr on Pauling Portfolio Review: 25 March 2022
  • HedgeHunter on Learning More About Options

Users Online

2 Users Online
Users: 2 Bots

Popular Posts

  • 2022 Guidelines for Relative Strength Portfolios
  • Hindsight is 2021 – A Year-End Retrospective and…
  • Protected: Modified Kipling Workbook with Risk Ratios
  • Preparing Investments for 2022
  • The True Cost of Management Fees
  • Response to Comments made by ITA member (John Shelton)
  • Using Volatility as a Diversifier and a Portfolio Hedge
  • Investment Policy Statement: February 2022
  • Hawking Portfolio Review – 1 April 2022
  • Dual Momentum Investing by Gary Antonacci

General Investment News

Portfolios coming up for review are:  Kepler, Bohr, and Franklin.  Non-scheduled portfolios may be reviewed.  If you are a new user, check the posts you missed. Links to Random Posts are found in the lower right-hand footer or just to the right of what you are now reading.  Most popular posts are found in the lower left-hand footer.

Check the Forum for more detailed information.  If you wish to begin a financial discussion, use the Forum.

Contact me at itawealth@comcast.net if interested in a Lifetime Membership.  Long-time Platinum members are now Lifetime members and this blog is free to all who signup as a Guest.  A few blogs are reserved for Lifetime members.

Random Posts

  • Franklin Portfolio Review: 7 December 2021
  • Bullish Percent Indicators: 18 September 2021
  • Millikan Interim Update: 9 December 2021
  • Bullish Percent Indicators: 4 March 2022
  • William Bernstein’s Latest E-Book: Getting Rich Slowly
  • Rutherford Portfolio Review (Tranche 2): 31 December 2021
  • Why I Use ETFs Instead of Individual Stocks
  • Carson Trio Reviews: 31 January 2022
  • Using Volatility as a Diversifier and a Portfolio Hedge
  • The Feynman Study: Part 6-4
  • Einstein Interim Review: 2 December 2021

Log in | Website Design by BOING