The Swensen Model

The Swensen Model of Asset Allocation:

The Swensen Model, named after Yale University's legendary endowment fund manager David Swensen, is a popular asset allocation strategy for long-term investors. This model is praised for its simplicity and effectiveness in diversifying investments to manage risk while aiming for steady returns. Let's break it down:

What is the Swensen Model?

The Swensen Model suggests dividing your investment portfolio into six main asset classes:

1. Domestic Equity (U.S. Stocks) - 30%: These are shares of U.S.-based companies. They offer growth potential but come with higher risk.
2. Foreign Developed Equity (International Stocks) - 15%: These are shares of companies based in developed countries outside the U.S. They provide global exposure and diversification.
3. Emerging Markets Equity - 5%: Shares of companies in emerging economies. They offer high growth potential but with increased risk.
4. Real Estate Investment Trusts (REITs) - 20%: These are investments in real estate properties or mortgages. REITs provide income and diversification.
5. U.S. Treasury Bonds - 15%: Government-issued bonds that are considered low-risk and provide steady income.
6. U.S. Treasury Inflation-Protected Securities (TIPS) - 15%: Bonds that are indexed to inflation, helping to protect your investment against the eroding effects of inflation.

Why Rebalance?

Rebalancing is the process of realigning the weightings of your portfolio's assets. It's crucial for maintaining your desired level of risk and ensuring your investment strategy stays on track. For example, if your domestic equity allocation grows significantly due to a market upswing, it might exceed your target of 30%. Rebalancing would involve selling some domestic equities and buying other assets to restore the original allocation percentages.

When to Rebalance?

There are two common approaches to rebalancing:

1. Time-Based Rebalancing: This involves reviewing and adjusting your portfolio at regular intervals, such as annually or semi-annually.
2. Threshold-Based Rebalancing: This method triggers rebalancing when an asset class's allocation deviates by a certain percentage from its target. For example, you might rebalance if any asset class's weight changes by more than 5% from its target.

Conclusion

The Swensen Model offers a straightforward approach to asset allocation, aiming for a balanced mix of growth and income while managing risk through diversification. Regular rebalancing ensures that your portfolio stays aligned with your investment goals and risk tolerance. As with any investment strategy, it's essential to conduct thorough research and consider consulting with a financial advisor to tailor the approach to your individual needs.