The basic Swensen Portfolio uses six securities. While David Swensen does not make specific ticker recommendations in his book, Unconventional Success, he describes the asset classes sufficiently to where we can easily find ETFs that fit his recommended asset classes. As I did with the Ivy 5, I’ll lay out the standard “Swensen Six” model and then expand it to make use of the Tranche Model. Over three years ago I wrote about the “Swensen Six” standard model for Seeking Alpha. Since that article, Swensen now recommends a 10% allocation to both VEA and VWO.
The “Swensen Six” is nothing more than a Strategic Asset Allocation (SAA) model using the following ETFs and percentages. In other words, this is a passively managed portfolio using six ETFs instead of 10 to 15 used in the Schrodinger, Copernicus, and Pasteur. Swensen does not include International REITs, International Bonds, Commodities, or Precious Metals. I have no trouble dropping the last two provided one has some risk reducing model in place as advocated by Faber and Richardson.
- 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%
At this point the portfolio is passively managed. Rebalance once per year by selling off ETFs that are above target and buy ETFs that are below target. To keep track of performance and the rebalancing percentages, use the TLH Spreadsheet.
And now we move on to see how one might apply the Tranche Model to the Swensen Portfolio.
Swensen Tranche Recommendations: With PCY and BIV absent from the “Swensen” portfolio, the recommendations take on a different look. The tranche worksheet below lays out the recommendations for investing in SHY, VTI, VNQ, and TLT. However, if one applies judgment, as I did with the Einstein, holding the entire portfolio in cash makes sense. All the recommended securities are showing negative absolute acceleration percentages as of 11/10/2015. Several (SHY and TLT) are priced below their 195-Day EMA and those same two ETFs have negative “Golden Cross” signals. At best, one purchases 50 to 100 shares of VTI.
Swensen Position Size: The Position Sizing worksheet does not show its stuff when zero shares are held in the portfolio. If the following guidelines are followed where we set the Maximum Trade Position Risk to be 2% the suggested portfolio risk is a modest 3.4%.