Hello, YieldAlley readers! In this issue:

🥇 The Best Index Funds (Morningstar)

🚀 How active dividend investing can boost yield and achieve growth (Ausbil)

💵 How Much Should You Have Saved by 30? 40? 50? 60? (A Wealth of Common Sense)

💳 Southwest's credit cards just got a major update (Yahoo Finance)

🤖 Meta is shelling out big bucks to get ahead in AI. Here’s who it’s hiring (CNN)

David Swensen, who served as Chief Investment Officer at Yale University from 1985 until his passing in 2021, transformed institutional investing and created one of the most studied portfolio models for individual investors. His approach, detailed in "Unconventional Success: A Fundamental Approach to Personal Investment," offers retail investors a simplified version of the Yale endowment model that earned legendary returns over decades.

The David Swensen Lazy Portfolio consists of six asset classes with specific allocations:

This 70% equity, 30% fixed income allocation reflects Swensen's belief in equity risk premiums while maintaining substantial diversification across asset classes and geographies.

Heavy REIT Weighting: Swensen's 20% allocation to REITs was notably high compared to other portfolio models. His experience managing Yale's successful real estate investments, particularly in timberlands and other alternative real assets, informed this decision. However, Swensen later reduced this recommendation to 15%, acknowledging that REITs available to individual investors differ significantly from institutional real estate investments.

TIPS Emphasis: The 15% allocation to Treasury Inflation-Protected Securities reflects Swensen's concern about inflation eroding purchasing power over long investment horizons. TIPS were relatively new when Swensen first advocated for them, representing his forward-thinking approach to inflation protection.

Treasury Bond Focus: Swensen deliberately excluded corporate bonds, believing that Treasury bonds provide superior downside protection during market stress without adequately compensating investors for additional credit risk. This philosophy prioritizes capital preservation over yield enhancement.

International Diversification: The 20% combined allocation to international developed and emerging markets reflects Swensen's global perspective, though this remains more conservative than the market-cap-weighted approach that would suggest higher international allocations.

From 1985 to 2025, the Swensen portfolio generated an 8.13% compound annual return with 10.91% standard deviation, placing it in the high-risk category despite its 30% bond allocation. The portfolio experienced a maximum drawdown of -40.89% with a 38-month recovery period, demonstrating the volatility that comes with equity-heavy allocations.

The portfolio's performance has been competitive with simpler approaches like the three-fund portfolio, typically outperforming by modest margins while adding complexity through additional asset classes.

Several investment professionals have questioned aspects of Swensen's individual investor recommendations:

REIT Allocation Concerns: Modern research suggests REITs don't provide the diversification benefits once assumed and may not serve as reliable inflation hedges. The high REIT allocation has drawn criticism from advocates of simpler approaches.

Complexity vs. Benefit: Some argue that the six-fund structure doesn't meaningfully outperform simpler three-fund portfolios while adding rebalancing complexity and potential behavioral challenges.

Suitability for Novice Investors: The sophisticated allocation may be inappropriate for beginning investors who might benefit more from simpler approaches before adding complexity.

For investors choosing to implement the Swensen model, low-cost ETF options include:

Tax Efficiency: TIPS generate "phantom income" from inflation adjustments, making tax-advantaged accounts preferable for holding these securities.

Swensen's individual investor recommendations differ significantly from Yale's actual endowment allocation. The endowment heavily emphasizes alternative investments like private equity, hedge funds, and natural resources, opportunities unavailable to retail investors. Swensen designed his "lazy portfolio" specifically for individual investors who lack access to these institutional investment vehicles.

While the Swensen portfolio remains popular among certain investor communities, the investment landscape has evolved since "Unconventional Success" was published. Many advisors now favor simpler approaches, particularly for beginning investors, while acknowledging that Swensen's core principles of diversification, low costs, and long-term thinking remain sound.

The portfolio serves as an interesting middle ground between extreme simplicity (two or three-fund portfolios) and complex factor-based approaches, though investors should carefully consider whether the additional complexity provides sufficient benefits for their specific situation.

For those drawn to Swensen's approach, the key lesson may be less about the specific allocations and more about his disciplined, long-term methodology and emphasis on staying the course through market volatility. These are principles that apply regardless of which lazy portfolio an investor ultimately chooses.

Government Money Market Funds (7-Day Yields)

Brokered CD Rates (6-Month Rate)

ETFs (30-Day Yields)

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