Saturday, July 14, 2012

Swenson Portfolio

Lecture six from the free Yale course has guest lecturer David Swenson (link to Yale). Swenson worked at Salomon Brothers and is credited for inventing the modern day swap. In plain English, a swap is a contract for exchanging currency at a set rate, with the exchange rate, the amount to be exchange and the length of time as parameters. The most common is Euros for US dollars. For example, a U.S. company might do a swap with a European company to agree to exchange $1 million USD for $1.23 million Euros every month for 60 months. Companies do these swaps to lock in costs, or profits.

Back to Swenson, in his lecture he talks about three main decisions for institutional portfolio managers:
1) asset allocation
2) market timing
3) security selection

Swenson's portolio, the Yale University endowment fund, has averaged about 16% since 1985, which is remarkably high.

Marketwatch has an individual's version of Swenson's portfolio (link2). It is basic index funds in unremarkable allocations.

Long time readers know that I am a fan of these Lazy Portfolio approaches for the vast majority of individuals. It is only those few that enjoy the activity, enjoy the study, or have a particular knack for stock picking or market timing that have any realistic chance to do better with trading as compared to these simple portfolios. Jack Bogle, founder of Vanguard is another widely cited advocate for the index approach (link3 to Boglehead Wiki). Another popular idea is the Permanent Portfolio (PERM is a single ticker solution with a 0.50% expense ratio) that allocates 25% each to bonds, cash, stocks, gold.

A stock market comment: I did close my LGF short puts at a bad time. The stock, and the overall market have bounced well off those lows. Had I filled my shopping list, I would have done very well for the day and a half. Getting whipsawed is a hazard of using stop losses, even mental stops. I am not a fan of actually leaving the stop orders on the books because they can be picked off. There will always be times when stops get taken out and then the stock reverses. The alternatives are to use wider stops, or not use them at. Each has its advantages and disadvantages, no one way will do best.

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