Search Results for: swensen

Do You Believe In Your Asset Allocation?

February 7, 2011 By Jonathan Ping 15 Comments
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asset allocation image from wikipedia

Mark Cuban recently had a post on his blog called Wall Street’s new lie to Main Street – Asset Allocation. In it, he quotes a recent newspaper article that presents this model asset allocation:

15% in an S&P 500 index fund
5% in a small-capitalization value fund
20% in a diversified international stock fund
5% in an emerging markets international fund
5% in Real Estate Investment Trusts
10% in stocks with a history of paying competitive and increasing dividends
10% in a diversified portfolio of convertible securities
5% in a U.S. Treasury inflation-indexed bonds and notes
15% in an international bond fund with traditional fixed coupon bonds
5% in an international bond fund for inflation-indexed bonds
5% in cash equivalents.

To which he translates as:

I want you to invest 5pct in cash and the rest in 10 different funds about which you know absolutely nothing. I want you to make this investment knowing that even if there were 128 hours in a day and you had a year long vacation, you could not possibly begin to understand all of these products. In fact, I don’t understand them either, but because I know it sounds good and everyone is making the same kind of recommendations, we all can pretend we are smart and going to make a lot of money. Until we don’t

Now, I don’t rely on Cuban for investing advice, but I do think he has a point. Over the past couple of years, I have to come value simplicity and also belief in investing. Now, I think asset allocation is important. To me, asset allocation is owning different assets that (1) all have good prospects for long-term returns above inflation, and (2) don’t necessarily move in the same direction. This allows you to reduce volatility when one things zigs while the other zags.

However, this also means you have to own said assets both when they are up and down. If the only reason you own something is because it’s in some financial newspaper article, then you’ll just sell it when the same newspaper starts touting the next new thing. This will likely lead to worse returns than just holding cash. You should only invest in asset classes that you understand and have strong reasons to hold in both good times and bad.

Here are the asset classes that I have strong beliefs in. This is of course my own personal opinion, but I’ll try to share my reasoning as well.
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Filed Under: Investing
Last updated: February 6, 2011
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Target Asset Allocation for Investment Portfolio

September 8, 2010 By Jonathan Ping 21 Comments
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

Asset allocation (AA) is an important part of portfolio design, and I like pinning down a target asset allocation for personal reference. This helps keep me focused as my portfolio shifts over time and makes it easy to re-balance back. For some educational posts on this topic, please refer to my asset allocation starter guide.

Below is my updated target asset allocation. Here is my target asset allocation from 2008. It’s not dramatically different, but I’ll try to explain the slight changes below. This is just my own AA, and I think everyone should develop their own based on their own beliefs and learning. If you just copy someone else’s without thinking, when things go awry you won’t have the foundation to stick to your guns. I have been strongly influenced by the writings of Jack Bogle, William Bernstein, David Swensen, Rick Ferri, and Larry Swedroe.

Stocks

I separate things out first into stocks and bonds, and then later it’s easy to go 60% stocks/40% bonds and so on. Here’s my stocks-only breakdown:

  • I now do a 50/50 split between US and International stocks. In general, I would like to mimic the overall world investment landscape. On a market cap basis, the US stock market is now about 45% of the world, while everyone else takes up 55%. 50/50 is just simpler, with a slight tilt towards domestic stocks.
  • I consider REITs a separate real estate asset class. I used to put Real Estate under US stocks since I only held US Real Estate Investment Trusts (REITs), but in the future I would be open to investing in foreign real estate as property laws improve and investing costs drop.
  • On the US side, I add some extra small-cap value companies. Historically, adding stocks of smaller companies with value characteristics (as opposed to growth) has improved the returns of portfolios while lowering volatility. There is debate amongst portfolio theories as to why this happened and if it will continue.

    If you buy a “total market” mutual fund or ETF, you’ll already own many of these types of companies (although many will not be held due to their small size relative to the big mega-corporations). I feel this adds a bit of diversification.

  • On the international side, I add a little extra exposure to emerging markets. You may be surprised to know that “emerging” countries like China, Brazil, Korea, India, Russia, and Taiwan already make up 26% of the world’s markets when you remove the US. These are countries that have a greater potential for growth, but also lots of ups and downs. I add a little bit more than market weight for these as well.

Bonds

I try to keep things simple for bonds, partially due to the fact that they are currently a smaller portion of my portfolio.

  • I like a 50/50 split between inflation-linked bonds and nominal bonds. Inflation-protected bonds provide a yield that is guaranteed to be a certain level above inflation. Nominal bonds pay a stated rate that is not adjusted for inflation. I like to balance the benefits of both.
  • Instead of only short-term US Treasuries for nominal bonds, I added some flexibility. I used to invest only in short-term US treasuries, as they provided the best buffer in my portfolio as they were of the highest quality and had a low sensitivity to interest rate fluctuations. Both TIPS and nominal Treasuries did great during the 2009 crash and the subsequent flight-to-quality, but now the yield on Treasuries is just too low in my opinion. There are trillions of dollars from countries and huge institutions around the world that are tucking their money away under the safe Treasury mattress. By venturing into other places they won’t with my tiny portfolio, I feel I can stay relatively safe yet increase my yield significantly. Possibilities include bank CDs, stable value funds, and high-quality municipal bonds.

Want more examples? Here are 8 model portfolios from respected sources, an updated Swensen portfolio, one from PIMCO’s El-Erian, and Ferri’s personal portfolio. Have fun!

Filed Under: Investing, Retirement
Last updated: November 6, 2011
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Betterment.com Review: Investing Made Simple, But Is It Worth The Cost?

June 4, 2010 By Jonathan Ping 18 Comments
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

New start-up website Betterment.com wants to make investing more easy… imagine something as simple as your existing savings account but with higher returns. Too good to be true?

How does it work?

At it’s very core, Betterment is a standard brokerage account, like E*Trade or Scottrade, which holds stocks and bonds in the form of exchange-traded funds (ETFs). On top of this, Betterment provides a lot of automation and simplification so that a user’s required day-to-day involvement is minimized.

Using a short questionnaire or a simple slider bar, you can choose a basic asset allocation (AA) of, say, 80% stocks and 20% bonds. After that, you just link a checking account and transfer money in and out as you please. When you move money into Betterment, they’ll buy ETFs automatically for you according to your chose asset allocation. If you want to withdraw, they’ll make the needed sell trades for you. Dividends are reinvested automatically, and your portfolio is rebalanced quarterly if off by more than 5%.

Asset Allocation Tools

For me, the part I played with the most was the interactive demo that illustrated potential returns based on past results. The dark blue line shows the historical average, dark blue bands indicate where 80% of outcomes have fallen, and the light blue bands show where 95% of outcomes have fallen. Here are some screenshots for a $50,000 portfolio of 85% stocks/15% bonds over 1 year and 10 years (click to enlarge).

(Past performance does not guarantee future results…)

Replace your savings account?

Betterment.com has been getting some heat – in my opinion rightfully so – for some of it’s marketing slogans as a “savings account replacement” or “better than a bank”. This is not a bank. You are buying stocks and bonds. You can lose a lot of money. Even their most conservative option of inflation-linked bonds can lose money in the short-term due to interest rate fluctuations. Yes, they admit this all somewhere, but it should be clearer. You just can’t compare yourself even indirectly with a savings account when the risk levels are so different.

Another example is this quote in their “Safe and Secure” section on the front page:

We are a member of the Securities Investor Protection Corporation (SIPC), which means the securities in your account are protected up to $500,000.

SIPC-insured is not the same as FDIC-insured. SIPC only covers restoring assets to investors if your firm goes bankrupt. It does not insure the value of those assets. It does not cover investment fraud. Will people get confused? I think there is a good likelihood that some will.

Portfolio

So what are you actually buying? For the stock portion of your account, you are buying a basket of ETFs broken down as follows:

  • 10% SPDR Dow Jones Industrial Average ETF
  • 20% iShares S&P 500 Value Index ETF
  • 20% iShares S&P 1000 Value Index ETF
  • 15% iShares Russell 2000 Value Index ETF
  • 15% iShares Russell Midcap Value Index ETF
  • 20% Vanguard Total Stock Market ETF

In my opinion, there is a lot of unnecessary overlap here. Of course, they’re paying for the trades, so maybe that in itself doesn’t matter that much. But more importantly, where’s the international exposure? I’d rather be invested in something as simple as 50% Vanguard Total Stock Market (VTI) and 50% Vanguard FTSE All-World ex-US ETF (VEU). You’d own fewer ETFs but more different companies and be globally diversified.

As for the bond portion, that’s 100% Treasury Inflation-Protected bonds via the iShares Barclays TIPS Bond ETF (TIP). Here, I’d rather see a 50% split between TIP and some nominal Treasuries bonds like IEF or SHY. (As recommended by David Swensen.) More diversification, same high credit quality.

Fees

There are currently no minimum balances required to invest. You don’t pay commissions per trade, but instead are charged a flat 0.9% annual management fee on top of the ETF management fees of about 0.20%. Just for their fees, that’s $45 a year on a $5,000 account, and $450 a year on a $50,000 account. So what you have here is a really simple wrap account. (Compare with Fidelity Portfolio Advisory Services.) In exchange, you get a lot of automation. No manually placing trades or remembering to rebalance.

If you have a low-balance account, this works out to be a pretty good deal *if* you like their portfolio above. Even a discount brokerages range from $7/trade at Scottrade to $3.95/trade at OptionsHouse. If you have only a couple thousand dollars to invest, Betterment can be very economical. (Though I suspect that they will have to change their pricing structure at some point for small accounts that trade a lot.) If you have $25,000 or more in assets, you can do much better on your own, and it’s more likely to be worth your time to expand your investment mix.

Reinventing the wheel?

Time to compare this with existing alternatives. You can already buy a nice all-in-one mutual fund from Vanguard like the Vanguard 2045 Target Retirement Fund (VTIVX) with a $3,000 now $1,000 minimum investment. In a similar manner, you can choose your general asset allocation and they’ll maintain and rebalance for you as well, gradually becoming more conservative as time goes on. International stock exposure including emerging markets is included. They’ll let you transfer funds to/from a bank account in $100 increments. Those trades are also free when you hold them at Vanguard.com, and all this costs just 0.20% annually including all fees. Compare this to 1.1% in total expenses you’ll pay at Betterment.

Finally, a quick note about tax efficient placement of assets. When possible, it’s usually better to place less tax-efficient assets like bonds into tax-sheltered accounts like IRAs and 401k plans. You can’t do this easily with such all-in-one systems.

Filed Under: Investing
Last updated: April 8, 2017
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

When Markets Collide: Book Review, Model Asset Allocation

September 29, 2008 By Jonathan Ping 13 Comments
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

The last book I reviewed was Financial Armageddon. Then I saw the title of this book: When Markets Collide. I almost stopped right there, as I was not at all in the mood for yet more doomsday talk.

However, I saw that the author, Mohamed El-Erian, ran the Harvard University Endowment for nearly two years, and is now the co-CEO of the huge bond investment company PIMCO. Throw in the fact that the tagline of this book is “Investment Strategies for the Age of Global Economic Change”, and perhaps this would be an insightful book about investing like David Swensen’s Unconventional Success. (Swensen ran the Yale University Endowment.)

Ease of Reading / Target Audience
The first I noticed about this book was that it was very difficult to read. The author tried to write this book for both experienced economic policymakers and the average investor. Not an easy feat. I felt that he came off as one of those guys who is just “too smart” and can’t simplify things for the rest of us. Here is an example of this high-level writing from the book:

The challenge of how to deal with consequential and volatile endogenous liquidity relates to another policy issue that I will discuss in Chapter 7: how to refine the traditional instruments of monetary control and ensure more meaningful and sophisticated supervision on a range of activities, with volatile leverage, that have been enabled by the ongoing structural transformations and yet are outside meaningful oversight.

Quick Summary: My Interpretation
The relationships between the economies of the world are changing. Emerging markets, which used to either be debtor nations or those who would only buy the safest thing available (US Treasuries), are growing fast and will start to invest their considerable wealth elsewhere, including equities. The U.S. can’t rely on other countries to buy our debt forever, just as the other countries can’t rely on U.S. consumers to prop up the world’s economy. This is where the “markets collide”. Throw in complicated structured investments like derivatives which nobody perfectly understands, and we are only in the beginning of a very bumpy road ahead.

Model Asset Allocation
So what is a U.S.-based individual investor to do? El-Erian states the three basic steps of portfolio management are: “choosing the right asset allocation, finding the best implementation vehicles, and conducting risk management.” Accordingly, here is his model asset allocation, with midrange percentages.

Equities (49% total)
15% United States
15% Other advanced economies
12% Emerging economies
7% Private

Bonds (14% total)
5% U.S.
9% International

Real Assets (27% total)
6% Real estate
11% Commodities
5% Inflation protected bonds
5% Infrastructure

Special Opportunities
8%

This adds up to 98%, but the way I read the book, the rest should be in cash. As a comparison, here is the asset allocation from Unconventional Success.

El-Erian doesn’t like home-bias and is believes strongly in being “globally-diversified”. You can see that only about 1/3rd of the equity allocation is to U.S. stocks. If an investor does have access to private equity, then you can redistribute that back into the other equities. In my opinion, he cops out in the active manager vs. passive index debate. He simply states that it’s really hard to find a good active manager, but if you can you should go with them. Of course, no further hints are given. 😛

As for bonds, he believes that bonds are overall a good portfolio diversifier to manage volatility. He also advocates a big portion of international bonds, which he believes are mature enough to be considered right beside domestic bonds. (He was also was an emerging bonds analyst for many years.)

Inflation is another big concern due to huge global growth, and thus there is a sizable allocation to real assets – commodities, real estate, inflation-protected bonds, and infrastructure (publicly traded equity and debt securities of utilities, airports, ports, roads, hospitals, etc.). Special Opportunities could mean speculative plays such as distressed debt or long-term environmental gambles like carbon credits.

In general, this is pretty different mix from many other model asset allocations I’ve read about.

Summary
When Markets Collide is mainly a macro-economics book as opposed to a how-to-invest book, but it does give some interesting insights about the future that might influence my personal investing strategies. For example, I agree that activities from non-U.S. countries will be increasingly important and their equities should be a significant part of one’s portfolio. I am not so sure (or educated) about the rest. I could only give a very superficial review here, so if this perspective sounds interesting and you want more details than I have given, I would read the book. If futuristic projections aren’t your thing, then I’d probably skip it.

Filed Under: Book Reviews, Investing
Last updated: April 25, 2019
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Asset Allocation: Investing In Real Estate Through REITs?

January 17, 2008 By Jonathan Ping 35 Comments
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When deciding on your portfolio’s asset allocation, another option beyond broad stock funds in domestic or international markets is to invest in is real estate. Besides directly owning a home or office complex, an easy way to get exposure is to own Real Estate Investment Trusts, or REITs.

What is an REIT?
From the National Association of REITs website:

A REIT is a company that owns, and in most cases, operates income-producing real estate such as apartments, shopping centers, offices, hotels and warehouses. Some REITs also engage in financing real estate. The shares of many REITs are freely traded, usually on a major stock exchange.

To qualify as a REIT, a company must distribute at least 90 percent of its taxable income to its shareholders annually. A company that qualifies as a REIT is permitted to deduct dividends paid to its shareholders from its corporate taxable income. As a result, most REITs remit at least 100 percent of their taxable income to their shareholders and therefore owe no corporate tax.

Since the REIT income essentially “passes through” directly to the shareholders, you are getting relatively direct exposure to commercial real estate. You’re not investing in a builder, or some other funky derivative. There are both domestic and international REITs, but lots of the following is based on US REITs.

Characteristics of REITs
Long-term historical data for REITs are not directly available, as there was not necessarily a consistent index to track them, or actual broad mutual funds investing in them. I’ve read various estimates from varying companies and academic studies via different books for returns (annualized).

To generalize, the performance of REITs is a little less than that of broad stock indexes, but higher than the return from bonds.

However, the main reason why many investment professionals and institutions all invest in REITs is that they have a historically low correlation with the overall stock markets, and also the bond market. This diversification benefit allows you to incorporate Modern Portfolio Theory and try to construct a portfolio with a better return/risk ratio than you had previously.
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Filed Under: Investing
Last updated: April 29, 2014
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Interim Asset Allocation: History, Decision, and Changes

January 7, 2008 By Jonathan Ping 15 Comments
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

Over the last year or so, I’ve learned a lot of new things about investing and asset allocation. At the same time, I know that changing your asset allocation too frequently is often a response to recent market activity (aka performance chasing, or market timing). In addition, I’m a highly analytical person and I love for things to have a correct answer to 5 significant figures before committing… which is pretty much impossible here. But at some point I know I just need to take action if I truly believe it is an improvement.

Previous Asset Allocation
In April 2006, I moved from the all-in-one Vanguard Target Retirement 2045 Fund (VTIVX) to a portfolio with more asset classes in an attempt to better optimize risk/reward factors based on historical data. You can see the asset allocation breakdown here. This asset allocation is pretty much what I have right now, except that I added a Micro-Cap stock fund and we moved money into a 401k with limited investment options.

Interim Asset Allocation

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I’m still continuing my series on building my portfolio, so I won’t explain all my actions here, but here are some quick summaries:

  1. Stocks/bonds allocation. I am shifting to a age-based formula for my stocks percentage. Using 115 minus my age, I am at 86% stocks and 14% bonds.
  2. Domestic/international allocation. I am increasing my international allocation to better match the world market. It’s essentially 50/50 if you think REITs are a separate asset class.
  3. Small/Value/Emerging Markets. These sub-classes are riskier than their overall market, but have been shown to have diversification benefits. Even if they don’t in the future, I am okay with them simply being more risky along with higher returns. Essentially, I am taking the total markets, and increasing the portion of one additional asset class which I think has the highest diversification benefits. For example, Small Value is a subset of Total US market, and Emerging Markets is a subset of the Total International market.
  4. Real Estate. I’m still holding REITs, as they are a way to invest in commercial real estate, and have also been shown to provide diversification benefits. Will give more references later.
  5. Micro-Cap, International Value, and Large Value. I think all of these potentially good asset classes to hold, but I think they are of lesser overall importance than the others. So in an effort to simplify, I am dropping them as separate funds. I still continue to have exposure the asset classes within other funds.
  6. New Bonds Allocation. I’ve been meaning to this for a while. I’ve been holding an intermediate-term corporate bond fund because it used to have a lower expense ratio after various fees. Inflation-protected bonds are still pretty new, but I’ve been convinced of their utility. I’ve also been convinced that bond ratings agencies just aren’t that good at their jobs, so I’m sticking with the highest quality bonds (Treasuries). The book Unconventional Success was a big influence here.

I call this my interim asset allocation because while I’m very confident this new setup fits my needs and preferences better than my previous asset allocation, I know that I will continue to learn and read. But just like with football coaches, this interim asset allocation might just become my permanent one.

In addition to all the books that I have read (and am still reading), I’d also like to say thanks to the many smart and helpful folks over at the Diehards.org forums for all the indirect and direct help. (I post anonymously at both forums.) Even though they sometimes feed my tendency towards complexity, I love the wealth of information that is available.

Filed Under: Investing, Retirement
Last updated: January 7, 2008
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Equity Asset Allocation: Comparison of 8 Model Portfolios

December 10, 2007 By Jonathan Ping 18 Comments
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

I’m still planning on reshaping my investments and continuing my choosing an asset allocation series, but Thanksgiving and work has thrown me off a bit.

To skip ahead a bit, here are several sample asset allocations from various sources for the equity (stock) side of your portfolio. I thought it would be helpful to see them all side by side and compare how different authorities might split things differently between domestic and international stocks, how they deviate from the “total” market indexes, and whether they choose to incorporate additional asset classes like real estate or commodities.

For more information about any specific portfolio and the source, just click on the pie chart.

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Filed Under: Investing, Retirement
Last updated: August 9, 2018
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Model Portfolio #8: Ben Stein and Your Money

August 15, 2007 By Jonathan Ping 8 Comments
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

Next up is a model portfolio by actor and personal finance columnist Ben Stein. I have read and reviewed two books he wrote with Phil DeMuth – Yes, You Can Still Retire Comfortably! and Yes, You Can Time The Market!. I actually ran across this information last week while waiting at a Barnes and Noble for my companions to finish shopping. I wrote down that it was in Forbes magazine, but I found the article online under Fortune. Either way, here it is:

Ben Stein Model Portfolio

Ben

Asset Allocation For 80% Stocks/20% Bonds (with ETF examples)
25% Total US Stock Market (VTI, IYY)
25% S&P 500 Index (IVV, SPY)
15% Foreign Developed Equity (EFA, VEA)
5% Emerging Markets (VWO, EEM)
5% Real Estate (VNQ, ICF)
20% Cash

Commentary
On the equity side, I guess he’s leaning towards only having about 15% of the domestic equity portion being Small/Mid Cap stocks, since about 70% of the Total US Stock Market index is made up of the S&P 500 anyways. His exposure to Real Estate is very small, especially compared to the Swensen portfolio we just looked at. He does add a specific allocation to Energy sector stocks to the mix, which you don’t always see.

On the fixed-income side, Stein doesn’t recommend any type of bond, corporate or not. He thinks long-term bonds are too risky, while short-term bonds don’t offer enough yield to warrant not just holding cash instead. I’m not sure if this is solely due to the current flat interest rate curve. This may also be because he seems to take the view that your emergency fund cash should be included in your asset allocation. (I like to keep it separate.)

See here for other model portfolios from respected sources, part of my incomplete Rough Guide to Investing.

Filed Under: Investing, Retirement
Last updated: August 16, 2007
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Unconventional Success: Investing in Core and Non-Core Asset Classes

July 30, 2007 By Jonathan Ping 27 Comments
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

One of the books I am currently reading is Unconventional Success: A Fundamental Approach to Personal Investment by David Swensen. He is a very successful institutional money manager, having guided the Yale University Endowment to over 16% annualized returns over 20 years. While he has already written a bestselling book about institutional fund management, Pioneering Portfolio Management, this newer book outlines his investment advice as tailored for individual investors. I’m not finished with it yet, but so far I am very impressed. This is one of the few people in the world who could easily say “Here’s how anyone can beat the market!”, but instead he presents a unique argument for building a portfolio using low-cost, diversified, passive components.

One of the ways he separates himself from others is his definition of “core” asset classes in which to invest. Briefly, core asset classes share three main characteristics:

  1. They rely on market-generated returns, not from active management skill (as it is a very rare attribute and hard to separate from luck).
  2. They add a valuable and differentiable characteristic to a portfolio.
  3. They come from broad, highly-liquid markets.

The six core asset classes he identifies are:

Domestic Equity
Foreign Developed Equity
Emerging Market Equity
Real Estate
U.S. Treasury Bonds
U.S. Treasury Inflation-Protected Securities (TIPS)

These are all pretty well-accepted asset classes. The surprise comes when he tells you where you shouldn’t invest. Here are the non-core asset classes which Swensen believes fail to satisfy one or more of the criteria above:

Domestic Corporate Bonds
High-Yield Corporate Bonds
Asset-Backed Securitiesl (like GNMA mortgage-backed bonds)
Tax-Exempt Bonds
Foreign Bonds
Hedge Funds
Leveraged Buyouts
Venture Capital

Many of these asset classes are very popular! Take corporate bonds. While I can’t present the argument nearly as well here, the basic idea is that they don’t satisfy the “valuable and differentiable” requirement above. People buy corporate bonds over Treasury bonds because they can get a higher yield. But Swensen argues that the slight premium is not enough to compensate for the additional credit risk, lower liquidity, and callability of such bonds. One source of this imbalance is the fact that the interests of the bond issuer (the corporation) are inherently at odds with the bond investor. The corporation wants to minimize the cost of it’s debt, while the bond holder wants the opposite. Compare this with the situation of a stock holder, where both want the company share value to increase.

Possible Portfolio Changes? If you invest any bond mutual funds, you may want to find out what percentage of those funds are in corporate bonds and asset-backed securities. For example, the Vanguard Total Bond Index fund (VBMFX) holds almost 45% in mortgage-backed bonds and only 35% in Treasury bonds. Of course, many young folks don’t have any bonds at all, so this may be a low priority.

Personally, my small bond allocation is 100% in corporate bonds. I always thought that bond markets were very efficient in dealing with credit risk, and that duration and sensitivity to interest rates mattered more than the type of bond. I will have to do more reading on this topic, but it may be more prudent to switch to Treasury bonds/TIPS and instead take any additional risk by adding more equities exposure.

Filed Under: Book Reviews, Investing
Last updated: April 25, 2019
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June 2007 Investment Portfolio Snapshot: Paralysis By Analysis, Call For Suggestions

June 26, 2007 By Jonathan Ping 67 Comments
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I haven’t posted my investment portfolio since April, mainly because it hasn’t really changed much. But here’s another snapshot:

6/07 Portfolio Breakdown
 
Retirement Portfolio
Fund $ %
FSTMX – Fidelity Total Stock Market Index Fund $15,132 19%
VIVAX – Vanguard [Large-Cap] Value Index $14,567 18%
VISVX – V. Small-Cap Value Index $14,251 18%
VGSIX – V. REIT Index $8,163 10%
VTRIX – V. International Value $8,686 11%
VEIEX – V. Emerging Markets Stock Index $8,929 11%
VFICX – V. Int-Term Investment-Grade Bond $7,616 10%
BRSIX – Bridgeway Ultra-Small Market $2,126 3%
Cash none –
Total $79,470
 
Fund Transactions Since Last Update
Bought $1,000 of FSTMX on 6/26/07 (23.759 shares)

Thoughts
Another couple of months have gone by, and my desire to re-define my asset allocation remains unfulfilled. All I did was buy some more of a Total US Market fund (FSTMX) through my self-employed 401(k). You’d think someone who writes about money on a daily basis would be on top of such things!

But really, I think I might actually be spending too much time on this. As Jack Bogle has stated, “The greatest enemy of a good plan is the dream of a perfect plan.” There is no perfect asset allocation, and I know that. I keep telling myself, I’m not looking for the perfect plan, just a better one which has been well-reasoned out, and one which I should have little reason to tinker with for a long time.

To achieve such a better plan, I have been re-reading each of my favorite investing books on top of many new ones (including All About Index Funds by Ferri, Unconventional Success by Swensen, Only Guide to a Winning Bond Strategy You’ll Ever Need by Swedroe), looking at their research, comparing their model portfolios, and trying to balance all the advice given. But after all these months, my slow deliberation has really just turned into what academics call “paralysis by analysis” and have been just been putting off making a decision for weeks. I do have some overall changes planned, including:

  • Increasing my allocation to international assets,
  • Decreasing my value tilt, and
  • Increasing my bond allocation.

I want to avoid trying to time the market, or chasing recent performance. But I also don’t want to base my decisions on simply trying to avoid the impression of trying to time the market. Although I’m always open to suggestions, I feel I need to some fresh input. Got an asset allocation suggestion? Ideas on a better value/size/country tilt? Another book to read? Throw it at me.

Filed Under: Investing, Retirement
Last updated: June 26, 2007
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Model Retirement/Investment Portfolios: A Comparison

January 19, 2007 By Jonathan Ping 30 Comments
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

In my rough guide to investing, I suggested some all-in-one mutual funds for beginners. But what if you want to go a step further and design your own portfolio? Or you have a 401k with only limited choices?

Of course, the best answer is always to read some good books. But another idea I’ve been meaning to do for a while is to collect the model portfolios from lots of different reputable books and sources and compare them to each other. You won’t see any individual stock picks here, all the sources will be based (at least loosely) upon modern portfolio theory and thus focus on optimizing the risk/reward ratio using proper asset allocation.

I think it should go without saying that since these are model portfolios, they are imperfect by design and at most should serve as rough guidelines for your own investing. Everyone has a different time horizons and situations. Use them as one part of your own research.

One way to tailor these portfolios to your own use is to adjust the stock/bond ratio according to how aggressive you wish to be. Accordingly, I have tried to separate the stock and bond components.

Completed Model Portfolios

  1. Couch Potato Portfolio
  2. Boglehead’s Guide To Investing
  3. All About Asset Allocation
  4. The Intelligent Asset Allocator
  5. A Random Walk Down Wall Street
  6. FundAdvice.com by Merriman
  7. Unconventional Success by Swensen
  8. Columnist Ben Stein

Future Model Portfolios (in progress)

Here are the remaining sources that I have in mind so far. Please feel free to suggest others.

  • The Four Pillars of Investing by Bernstein (Review)
  • Common Sense on Mutual Funds by Bogle (Review)
  • The Informed Investor by Armstrong (Review)
  • Index Funds: The 12-Step Program for Active Investors by Hebner (Review)
  • Coffeehouse Portfolio by Schultheis

This index of posts has been added to my Rough Guide To Investing.

Filed Under: Investing, Retirement
Last updated: July 11, 2014
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

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