Swensen 'Six' Portfolio Update

Includes: TLT, VNQ, VTI, VWO
by: Lowell Herr

Where to position investments for the second quarter.

Why add two bond ETFs to the Swensen Six?

Using Position Sizing to control portfolio risk.

Most investors are familiar with David Swensen, the brains behind the successful Yale University endowment fund. In his book, Unconventional Success, Swensen lays out a model portfolio of six asset classes as explained in this Seeking Alpha article. While the six ETFs provide global coverage, there are no domestic or international bond ETFs. In the following analysis, two bond ETFs are added to the Swensen Six to make up what I call the "Swensen Eight." AGG and IAGG are the two added ETFs to the basic Swensen Six.

Buy-Hold-Sell Recommendations: Current Buy-Hold-Sell recommendations are:

  • U.S. Equities (VTI)
  • Emerging Market Equities (VWO)
  • U.S. Real Estate (VNQ)
  • 20+ Year Treasury (TLT)

Investors holding accounts at Fidelity, TDAmeritrade, Schwab, etc., can easily find low-cost commission free ETFs to populate a portfolio containing asset classes of U.S. Equities, Developed International Equities, Emerging Market Equities, U.S. Real Estate, Bonds, and Treasuries.

The portfolio covers the globe and contains a balance between equity offerings and bond/treasury assets. U.S. Bonds (AGG) and International Bonds (IAGG) are added to the basic six Swensen asset classes so as to provide additional "off-ramp" options for the time when equities fall out of favor. There is an example of this in the following table as TLT is recommended over VEA.

ETFs are deemed of interest based on look-back periods of 60- and 100-trading days. In addition, low volatile ETFs gain additional favor so as to hold down portfolio risk.

Manual Risk Adjustments: How many shares of the four recommended ETFs should one purchase? The following Position Sizing worksheet is designed to guide the money manager in how many shares to buy, hold, or sell of each security.

The Maximum Portfolio Risk is adjusted to be 8%. If that is too high, the value can be lowered which will then lower the number of shares to be held in the recommended ETFs. I frequently set the risk to 5% or 6%.

In the eighth column from the right-hand edge are the number of shares of each ETF to purchase to populate this $100,000 portfolio. I generally round to the nearest 5 to 10 shares and if possible, buy in round lots.

Once the portfolio is fully populated, wait at least a month before the next review so as to not incur short-term trading fees. By waiting over 30 days before the next review, one also avoids activating the wash-sale rule.

This Buy-Hold-Sell momentum oriented model is designed to protect investors from deep bear markets. Market corrections and recessions will move one out of equities and into bonds or cash. Since I am using four (4) as the Maximum Number of Assets, I wanted at least four bond/treasury ETFs as exit options. That is another reason for added the two bond ETFs to the basic Swensen Six.

Disclosure: I am/we are long VTI VWO VNQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.