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I find that I am talking a lot about asset allocations these days – the reason is simple. Asset allocation is how investors can manage risk, reduce the volatility in their portfolios, and above all else, is what drives the majority of the returns in a portfolio. Consider the following statement from the folks over at Merriman Berkman Next (Sound Investing Podcast):
Dimensional Fund Advisors studied the returns of 44 institutional pension funds with about $450 billion in assets over various time periods averaging nine years. The study concluded that more than 96 percent of the variation in returns could be attributed to the kinds of assets in the portfolios. Most of the remaining 4 percent was attributable to stock picking and the timing of purchases and sales.
Read that again if it didn’t sink in. 96% of the variation in returns could be attributed to the kinks of assets in your portfolio. In other words, it is not about the individual stocks or funds you hold in your portfolio. It is primarily about the structure of that portfolio and the combination of assets you hold. Like last weeks article which looked at asset allocation of pension funds I had a look at some other big-time money managers for how they structured their asset allocations. This lead me to do some research on what the asset allocations of one of the most successful investment funds of our time – The Yale Endowment Fund. The Yale fund has boasted an annualized return of 17.2% during the last 10 years (source)! With returns like that I think it is wise to see how they did it.
It came down to their asset allocation. The asset allocation used by the fund was simple, yet very effective. Here is how it broke down:
Click to EnlargeTo fully describe what each of these asset classes entail within the fund, I would need about 10 pages and I would also bore you to death. However, I do truly believe that if you are managing your own portfolio you need to read the annual report from the fund to read about each of these classes. I found that I learned a lot in doing so.
This is quite an interesting article. I learned about timber as a separate asset class after researching the Yale endowment.
Very informative article. I am still a little confused about the “Absolute Return” asset class. I read it on Yale’s annual report and it seems to be more speculative investments, but they didn’t really say it specifically. Do you have any more information about this asset class?
Hi Dividend Guy, I enjoy your blog.
Mebane Faber on “Seeking alpha” reported on the Harvard and Yale endowments back in 2006 (http://etf.seekingalpha.com/article/20922).
I subsequently wrote this message board entry on these endowments:
http://dripinvesting.org/Boards/Read.asp?MID=55216
where I compared the asset allocations in the 2 funds and reflected on what could be done by retail investors.
standard deviation of returns is not risk. i recommend that people who think that it is become familiar with the writings of Taleb…The Black Swan. once people wake up to the fact that the world of investing, whether it is Treasury bonds, high-yield bonds, large cap stocks, small cap stocks, commodities, currencies, real estate, and yes even timber, measures such as standard deviation simply do not apply…so why are people using it…because its simple and easy to understand. there is simply no way to synthesize risk into one number…people, please read Taleb
There is a more up-to-date study of Harvard/Yale endowments multiple asset class approach – “All-weather portfolio: how Harvard/Yale endowments invest for bad times.”
http://investmentscientist.wordpress.com/wp-admin/index.php?page=stats&view=searchterms&numdays=7&blog=1104960
Wrong link above. Here is the correct link.
http://investmentscientist.com/2008/09/21/all-weather-portfolio-investing-like-yale-harvard-endowments/
Franklin Delano Roosevelt was President of the United States in 1932, the year the country was spiraling into recession. Many people wonder if the future of our country is heading to the same economic disaster. Franklin Roosevelt’s “New Deal” economic policies radically restructured the performance of the U.S. economy. Essentially, the government’s role in the economy expanded to a degree no one had ever seen. Roosevelt’s policies provided the short-term relief that the country needed, but for the long run, it can be argued that they caused significant long-term damage. In a Wall Street Journal article, Paul Rubin suggests that while the current state of the U.S. economy is not in the same state as it was back in 1932, the aspects and factors we see today are incredibly similar to the 1932’s economic crisis: stock market in a tailspin, credit markets locking down and Sen. Barack Obama, the leading Democratic presidential candidate, who is firmly running on a platform that will inject increased government regulations into problem areas like the economy. Especially now a days that the country is facing on the economic crisis does Obama has the capacity and potential to lead the nation of it may happened to that they want to become the president of the America that’s because for the welfare only. Supporters of a free market economy are concerned that Obama’s proposed governmental policies will lack the long-term direction America so desperately needs. Those who support the principles of capitalism will disagree that we’re better off than in 1932. Mostly of the supporters of the Obama’s principle those people that are not involve in the payday lending institution that are not thinking of the welfare of the other’s payday lenders are in some aspect they are found out to realized that they are the friendly user’s for the loan. That because whether they like it or not we are in never indeed that despite of the crisis we in get through with we need some other resources on how to we get through with the payday loan institution.
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The Philadelphia Phillies have been crowned World Series champions. It’s been 28 years since the last time they climbed to the top of the mountain (1980). Back then, Mike Schmidt, Pete Rose and Steve Carlton showed the American League the meaning of spirited, winning baseball. Now in 2008, Cole Hamels has been named the World Series MVP.Emotions run high as the city of Philadelphia prepare for celebration of the boys bringing home the Commissioner’s Trophy. However, community supporters like Temple University are preparing for mass rioting. Temple had beefed up security and surveillance cameras and also stated that “students involved in vandalism, refusal to disperse, destruction of property, etc. will face both criminal and University disciplinary action.”
Is it really necessary for a feel of police state crackdown? I mean, this is Philadelphia, the “City of Brotherly Love” – of course it is! So, if you do happen to be ready to riot, take a chill pill first. Remember to be respectful and be happy. If someone happens to smash in your windshield and you need some help to take care of it before you’re paid again, affordable personal loans are available at the click of a mouse. That is, if it still works after those liquid wild-sprayings.
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If you’re a movie lover, you may have heard of the recently released Kevin Smith film called Zack and Miri Make a Porno. The film’s premise is that two lifelong friends and roommates, strapped for cash, debt piling up, decide to make a pornographic film in order to pay their bills off. Now, this kind of thing only happens in Hollywood, or at least that solution only does. The rest of us struggle in very real life with debt and paying bills. Those of us that don’t live on screen wouldn’t resort to that in order to make ends meet, because we have other options. You can always apply for bad credit installment loans to keep your lights on until your next paycheck.
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