An Intelligent Asset Allocation Plan

Asset Allocation Example

Structured SettlementBest Companies For Structured Settlement

If you have a structured settlement and you are considering selling it, refer to this source to read more on selling structured settlements and the best structured settlement companies that will buy your payments for cash.

A good starting point for creating your asset allocation plan is to look at the allocations of some of the very smartest investors around – the managers of leading Ivy League endowments. Innovative endowments like Harvard and Yale were pioneers in reaching beyond the familiar asset classes of stocks and bonds to add real estate, commodities, international stocks,emerging-markets stocks, and alternative asset classes like hedge funds and private equity. As a result, the Yale endowment has outperformed the U.S. stock market (and the S&P 500) by more than 8% a year over the past 20 years, while also experiencing substantially lower volatility (a measure of risk).

David Swensen, the portfolio manager of Yale University’s endowment, recommends this allocation for individual investors: [xii]

  • 30% U.S. Stocks
  • 20% U.S. real estate
  • 15% international developed-markets stocks
  • 5% emerging-markets stocks
  • 15% TIPS (Treasury Inflation-Protected Securities)
  • 15% U.S. Treasury bonds

With a 50% allocation to global stocks, this portfolio has enough “juice” in it to perform well in a time of rising asset prices and high economic growth like the 1990s. At the same time, the 30% allocation to bonds (split between TIPS and standard Treasury bonds) will hold up well in a bear market like 2008, and the TIPS and sizeable real estate portion will hold up in a severe inflationary environment like the 1970s.

That said, there are a few areas where some investors may want to tweak Swensen’s recommendations a bit. (Warning: Esoteric material follows.) Here are some suggestions:

  • Holding a diversified bond allocation rather than U.S. Treasury bonds only. Swensen recommends holding all bond allocation in the form of U.S. Treasury bonds, or Treasuries, reasoning that corporate bonds do not provide significant diversification to a portfolio that already holds stocks in the same companies. Other gurus advocate holding corporate bonds, mortgage-backed securities, municipal bonds, and international bonds as well, and investors in a higher tax bracket may want to look at municipal bonds.
  • Holding a greater percentage of the portfolio in foreign or international assets. Swensen’s recommendation results in 80% of a portfolio’s assets in domestic, U.S. dollar assets. Other finance gurus advocate greater international exposure than this, particularly to emerging markets like China and India.
  • Adding direct commodity exposure. Swensen’s suggested portfolio has a large exposure to real estate, but it does not invest directly in commodities. The ability to easily invest in commodities through ETFs is a relatively new development in the world of finance. Some investors may want to take advantage by adding commodities to their portfolio.
  • Decreasing the allocation to U.S. Treasuries. Swensen recommends a 30% allocation to U.S. Treasuries, equally split between inflation-protected securities and regular Treasury bonds. Given the current historically low Treasury yields that may be partly a result of unprecedented quantitative easing (or “money printing”) from the Federal Reserve, some investors may wish to reduce this allocation. [13]

If you make these adjustments, a large ($200,000 plus), portfolio might include

  • 25% U.S. stocks
  • 14% international stocks from developed markets
  • 14% international stocks from emerging markets [xiv]
  • 15% TIPS
  • 7% U.S. Treasuries[xv]
  • 9% U.S. real estate
  • 7% Foreign real estate
  • 9% commodities[xvi]

Some investors may prefer a simplified, “lite” version that includes less tinkering, either because they have a smaller account (under $200,000), or because they just do not wish to mess with so many asset classes. It is possible to achieve the diversification of the Swensen portfolio by using a single ETF or low-cost index fund that contains three or four asset classes.

Swensen “lite”:

  • 50% global stocks
  • 15% TIPS
  • 20% U.S. real estate
  • 15% U.S. Treasury bonds

Unless it is something that interests you, it is not worth getting too bogged down in the details. The key is to pick a plan that is broadly diversified and makes sense to you, and stick with it.