Measuring The Performance of David Swensen’s Lazy Portfolio

Lazy sunday...
(photo:Dan Queiroz)

Over at My Plan IQ they’ve been analyzing the performance of David Swensen’s model portfolio. It’s been successful over the long term, they conclude, but recently some weaknesses have begun to hurt its performance.

Swensen is the long-time manager of the Yale University Endowment and the model portfolio he suggests for an average investor is:

  • 30% in Vanguard Total Stock Market Index (MUTF: VTSMX)  ), (NYSE: VTI)
  • 20% in Vanguard REIT Index (MUTF: VGSIX), (NYSE: VNQ)
  • 20% in Vanguard Total International Stock (MUTF: VGTSX) or 15% in (VGTSX) and 5% in (MUTF: VEIEX), (NYSE: VEU), (NYSE: VWO), (NYSE: VEA)
  • 15% in Vanguard Inflation Protected Securities (MUTF: VIPSX), (NYSE: TIP)
  • 15% in Vanguard Long Term Treasury Index (MUTF: VUSTX), (NYSE: TLT)*

A Lazy Portfolio That Has Done Well Over Time

Their initial examination focused on the portfolio’s long term results and how it compared to benchmarks and alternative versions of the portfolio.

“A Lazy portfolio is appealing because it requires so little effort to maintain it,” they write. “If we can find a portfolio that requires little effort and still delivers good returns, then let’s use it.” Under their testing, Swensen’s model seems to stand up to that test. The authors  conclude it is, “a well-chosen, simple set of funds that gives you good diversification and has delivered reasonable returns.,”

The group’s second review focuses on how the portfolio has fared over the last three months, with the coming end to the government’s quantitative easing program, and the exit from Treasuries of big-name fixed income investors like PIMCO’s Bill Gross.

Over the shorter term they find that equities have continued to do well, so that helps Swensen’s model, which only has 30% in fixed income. But portfolios with broader exposure to commodities — and the freedom to move out of fixed income and into cash — did better.

Stay Active

This leads them to argue that:

For those who are serious about optimizing their long-term investments, you have to be involved. A lazy portfolio is appealing because you can “fire and forget” with only quarterly adjustments. However, if you want more out of your investments and accept that conditions will change, then a portfolio with monthly adjustments is more likely to give you better returns. It’s our contention that a monthly review (not necessarily requiring action every month), is about the right frequency.

Being lazy, it seems, may only get you so far.

(Editor’s Note: This list originally cited a corporate bond ETF for this portion of the portfolio. That is not a good proxy. TLT is a better ETF here, but please read the comments below for some additional insights on other options for meeting Swensen’s goals.)

6 thoughts on “Measuring The Performance of David Swensen’s Lazy Portfolio

  1. TFB

    Three months?! So much for investing for the long term. In addition, LQD is a corporate bond ETF; Swensen said use Treasuries. He didn’t say use all long-term Treasuries either. He said match the market duration, which means intermediate-term Treasuries.

  2. Nanette Byrnes Post author

    Thanks TFB for the link to Swensen’s advice on implementing his fixed income advice. He talks about balancing two ETFs, the IShares 1-3 Treasury (SHY) and the IShares 20+ Treasury (TLT)to get to a match of the market duration. The market duration he used was the Lehman US Treasury Index. Is that now a Barclay’s Index? Curious what the best benchmark is today.

  3. Simon Napper

    I apologize for the error with LQD. LQD is not the right replacement for VUSTX, TLT would be better. Swensen specifically mentioned using long term treasury bonds as portfolio hedge.

  4. TFB

    @Nanette – Lehman US Treasury Index is now Barclays US Treasury Index. Go to https://ecommerce.barcap.com/indices/index.dxml, then click on Government under Benchmark Indices. Find US Treasury. Modified Duration is 5.2 years.

    @Simon – Yes, there are some confusions as to what duration Swensen meant to use in the model portfolio. He clarified in an email exchange saying match the market duration. See the link in my previous comment.

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