Analyzing A Swensen-Faber Merged Portfolio

by: Lowell Herr

Merging ideas from the "Swensen Six" and "Faber Ten" portfolios has the potential to generate a wide array of asset allocation plans. In the following example I am sticking with the general percentages allocated to the broad asset classes, as recommended by David Swensen, but you will see that I am adding asset classes as suggested in the "Faber Ten" portfolio.

Swensen recommends holding 30% in U.S. Equities. In the simplest form, this would result in 30% allocated to VTI, Vanguard's Total U.S. Market Index ETF. To skew the portfolio toward smaller companies and value oriented firms, I am breaking that 30% to include VOE, VBR (IWN is another choice.), VO, and VB. As you can see from the screenshot below, the returns for the added ETFs are projected to be higher than for VTI alone. I am still maintaining the 30% allocated to U.S. Equities. The breakdown is just a little different than either the Faber or Swensen portfolios. These are only projections and we have no idea how this allocation plan will pan out over the next six to twelve months.

I am not changing the percentage allocation to international markets. As recommended by Swensen, 15% is allocated to developed international markets (NYSEARCA:VEU) and 5% to emerging markets (NYSEARCA:VWO). Note that VEU includes companies that fall into emerging markets, so this portfolio is not a "pure" 15% - 5% breakdown. In a later analysis, I am likely to go for an even split between developed and emerging markets as the projected return is higher for VWO than it is for VEU.

In the "Faber Ten" portfolio, commodities and international REITs are included as inflation moderators. Instead of allocating 20% to U.S. REITs (NYSEARCA:VNQ), readers will see that I broke this 20% into 10% to VNQ, 5% to international real estate (NYSEARCA:RWX) and 5% to commodities (NYSEARCA:DBC). At some point I want to run a QPP analysis that includes only VNQ as it has a higher projected return than either DBC or RWX.

QPP Analysis: How the "Perfect Dozen" stack up against our portfolio goals.

  1. At a projected 7.9%, we are just shy of our 8% goal which is 1% point higher than that projected for the S&P 500. We might capture that 0.1% point deficit by altering the asset allocation plan as suggested above.
  2. The projected standard deviation or portfolio uncertainty comes in under 15%. At some point I will stress test this portfolio to show that even at 14.3% we can run into retirement problems. The 14.3% value should not frighten a young investor, but it is on the high side for someone in retirement who does not have a sizable pension and social security income..

The Return/Risk ratio is 0.55 or below our goal of 0.60. We need to elevate the projected return and lower the portfolio uncertainty if we expect to reach the 0.60 Return/Risk value.

Now we move down to the Diversification Metric (DM). At 32% DM is on the low side as our goal is 40% or higher. The last metric of interest is Portfolio Autocorrelation. My preference is to see this below 20% to 25%, and we meet that goal. Overall, this is a solid portfolio that is not overly complicated. An added plus is that TD Ameritrade clients can apply for commission free access to all these ETFs, reducing transaction costs.

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