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Investment Opportunities

David Swensen and The Yale Model

David Swensen doesn’t have a household name like Warren Buffett or Jim Rogers. But he’s one the greatest investors of our time. Many even consider him the “Babe Ruth” of endowment fund managers.

Since 1985, Swensen’s grown Yale University’s endowment from just over $1 billion to $19.3 billion. Over the last two decades, he’s generated returns of 13.7% per year. In comparison, other colleges and universities have only averaged gains of 8.7%.

Moreover, when Swensen started managing Yale’s endowment, it only supported 10% of the school’s annual budget. This was its lowest level in over a century. Today it covers over 30%. And that number is expected to grow.

Swensen developed an investing strategy that broke away from simply owning traditional U.S. stocks and bonds and promoted buying other asset classes, such as emerging markets, natural resources, and alternative investments in hedge funds and private equity funds.

But the problem with this was his strategy was intended only for large investors, like institutional investors and other endowment funds. So in 2005, Swenson released Unconventional Success. And it outlined six asset classes ordinary investors can plop their cash to take advantage of his Ivy League strategy.

Invest Like an Ivy Leaguer

Here’s a look at Swensen’s asset allocation recommendations:

Asset Class%
Domestic Stocks30%
Foreign Developed Stocks15%
Emerging Market Stocks5%
Real Estate and Natural Resources20%
U.S. Treasury Bonds15%
U.S. Inflation-Protected Securities (TIPS)15%

Like Investment U’s asset allocation model, many of these assets are non-correlated. That means they change in value as market trends change. For instance, right now domestic stocks are flirting near all-time highs once again. And every day they go higher, it seems gold prices go lower.

Swensen believes that if you’re an average investor, you’d be better off not trying to beat the markets and simply putting your money in index funds. In fact, in his book, he makes three recommendations. He suggests you diversify into the six asset classes above. He recommends you only rebalance your portfolio to the original weightings once or twice a year. He also suggests you make it a point to find low cost index-funds and exchange-traded funds (ETFs).

So what are some low cost index-funds and ETFs that you can look into right now?

Six Plays for a “No-Hassle” Portfolio

MotifInvesting.com has a portfolio dedicated to Swensen’s strategy. It’s up 10% over the past year and provided a steady dividend yield of 3.1%. The portfolio currently holds:

  1. Vanguard Total Stock Market ETF (NYSE: VTI): This tracks the performance of U.S. stocks.
  2. Vanguard MSCI EAFE ETF (NYSE: VEA): This monitors European, Australasian, and Far Eastern markets.
  3. Vanguard MSCI Emerging Markets ETF (NYSE: VWO): This follows emerging markets found in the MSCI Emerging Markets index.
  4. Vanguard REIT Index ETF (NYSE: VNQ): This tracks the performance of U.S. real estate investment trusts.
  5. iShares Barclays 7-10 Year Treasury ETF (NYSE: IEF): This is directly tied to the price performance and yield of the mid-term sector of the U.S. Treasury market.
  6. iShares Barclays TIPS Bond ETF (NYSE: TIP): This replicates the inflation-protected sector of the U.S. Treasury market.

If you’re unfamiliar with investing, it may be in your best interest to consider investing in a diversified basket of ETFs that simply track the movements index funds. The truth is, most active portfolio managers should probably be doing the same thing as evidence shows index funds outperform actively managed mutual funds more times than they ever should.

Our very Alexander Green has developed his own “set it and forget it” portfolio called The Gone Fishin’ Portfolio. He wrote a book about it in 2003 and it quickly became a New York Times bestseller.

Like Swensen, Alex also likes the low-cost Vanguard funds, but the instruments and allocations are slightly different:

  1. Vanguard Total Stock Market Index (VTSMX) – 15%
  2. Vanguard Small-Cap Index (NAESX) – 15%
  3. Vanguard European Stock Index (VEURX) – 10%
  4. Vanguard Pacific Stock Index (VPACX) – 10%
  5. Vanguard Emerging Markets Index (VEIEX) – 10%
  6. Vanguard Short-term Bond Index (VFSTX) – 10%
  7. Vanguard High-Yield Corporates Fund (VWEHX) – 10%
  8. Vanguard Inflation-Protected Securities Fund (VIPSX) – 10%
  9. Vanguard REIT Index (VGSIX) – 5%
  10. Vanguard Precious Metals Fund (VGPMX) – 5%

Although the weightings and investments slightly vary, the idea is the same. You can be successful with almost no work by diversifying a collection of low-correlation, low-cost index funds, and only rebalancing about once per year.

Since its inception, the average gain of The Gone Fishin’ Portfolio’s holdings is up an astounding 147%. And to think, all these funds do is follow the movements of index funds.

That’s about as hassle free as it gets.

So if you’re new to investing, this may be your best bet.

Good Investing,


Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.

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