Three Investment Gurus Share Their Model Portfolios

How do some of the most respected investors on the planet think Americans should be investing their money?

  • David Swensen has made an average return of 13.9 percent a year over the last 20 years for Yale, adding $20.6 billion to the university’s endowment. That gives him the best track record if any institutional investor around. “Low costs and diversification serve investors well,” he says.

  • Gretchen Tai runs Hewlett-Packard’s pension and 401(k) plans. She’s got a great track record, too. “Be disciplined and stick to your savings plan, and keep an eye on the total fees you pay for managing your portfolio,” she says.

  • Jack Bogle created the world’s first index fund for ordinary people. He founded the Vanguard Group, which now manages $3 trillion. “Buy a stock index fund and add bonds as you age,” he says.

David Swensen

Chief Investment Officer, Yale University

1. Diversify

Instead of just investing in U.S. stocks and bonds, Swensen advocates a broader range of asset classes. He suggests stocks from developed and emerging markets around the world. And he suggests owning real estate through a low-fee fund as a part of your portfolio. In addition to traditional U.S. Treasury bonds, he advises investors to own Treasury inflation-protected securities, or TIPS. In his sample portfolio, he says, some of these slices of the pie will likely rise and fall and rise again at different times and at different rates. So he says to rebalance at least once a year to maintain your target allocation.

Swensen’s Model Portfolio

55% Stock
15% Real Estate
30% Bonds

Stocks Domestic equity: Stocks in U.S.-based companies listed on U.S. exchanges. 30%
Stocks Foreign developed equity: Stocks listed on major foreign markets in developed countries, such as the United Kingdom, Germany, France and Japan. 15%
Stocks Emerging market equity: Stocks from emerging markets around the world, such as Brazil, Russia, India and China. 10%
Bonds U.S. Treasury inflation-protected securities (TIPS): Special types of Treasurys that offer protection from inflation, as measured by the consumer price index. 15%
Bonds U.S. Treasury securities: Fixed-interest U.S. government debt securities. The income is only taxed at the federal level. 15%
Real Estate Real estate investment trusts (REIT): Stocks of companies that invest directly in real estate through ownership of property. 15%

2. Pay the lowest fees possible

Fees can do terrible damage to your investment returns. Even in higher-risk, higher-return asset classes such as stocks you can only expect high-single digit or low double-digit returns over long periods of time. So if you end up paying 1 percent to a financial adviser, and then 1 percent to 2 percent on top of that in mutual fund fees and then adjust for inflation (2 percent to 3 percent a year), you’re losing half of your returns or more, Swensen says. The odds, he says, are overwhelmingly in favor of index funds.

So Swensen says very-low-fee index funds make the most sense for individual investors. He says if you compare performance of higher-priced actively managed mutual funds to lower-cost index funds, “when you look at the results on an after-fee, after-tax basis over reasonably long periods of time, there’s almost no chance that you end up beating an index fund.” The odds, he says, are overwhelmingly in favor of index funds.

Low-Fee Fund Examples – (Not an all inclusive list.)

Below are examples of some low-fee funds that match the various asset classes in Swensen’s model portfolio. The cost of the funds are on the right hand side — most are well below 0.5 percent. These funds are examples of options offered by investment firms and are not meant to be endorsements.

Type Fund Name Annual fee / expense ratio
Stocks Fidelity Spartan 500 Index (FUSEX)
Vanguard Total Stock Mkt Index (VTSMX)
Schwab Total Stock Market Index (SWTSX)
Foreign developed equity Vanguard Total International Stock Index Fund (VGTSX) 0.22%
Emerging market stocks Vanguard Emerging Markets Stock Index Fund (VEIEX) 0.33%
Bonds Vanguard Intermediate-Term Treasury Fund Investor Shares (VFITX)
Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX)
Real Estate Vanguard REIT Index Fund (VGSIX) 0.26%

3. Adjust your portfolio as you age

When it comes to investing, Swensen says, “there is no such thing as one size fits all.” His model portfolio is “well-diversified, equity-oriented for long-term investors and efficient in the sense that it is as good or better than other alternatives,” he says. “So my model portfolio should serve most investors well.”

Essentially, what Swensen is saying is that when you’re investing for long periods of time — 20 or 30 years, for example — you are likely to make more money holding a sizable portion of your portfolio in stocks or other assets with a high expected rate of return. That’s because historically, stocks offer greater returns than “safer” alternatives such as U.S. Treasury bonds over the long term. But in the short term, stocks tend to be much more volatile. So as people near retirement age, many investment advisers suggest shifting more assets to the “safer than stocks” category. If the stock market crashes and you need to be spending money out of your portfolio as income in retirement, you don’t want to suddenly lose 20 or 30 percent of your savings and be forced to sell stocks at a low price. If you’re younger and stocks crash, you can just hang tight and wait for the market to recover.

Gretchen Tai

Runs Hewlett-Packard’s pension and 401(k)

1. Active management and fees

“Fees matter, so you should be careful what you choose to pay,” Tai says. She says whether you go with active or passive management, try to keep the total fees you are paying in your portfolio at or below 0.5 percent. That’s half of 1 percent. Many financial advisers charge twice that — on top of any mutual fund fees you’re paying. But Tai says she doesn’t think most people need financial advisers.

Low-Fee Fund Examples

Below are examples of some low-fee funds that match the various asset classes in Tai’s model portfolio. The cost of the funds are on the right hand side — most are well below 0.5 percent. These funds are examples of options offered by investment firms and are not meant to be endorsements.

Type Fund Name Annual fee / expense ratio
Stocks Fidelity Spartan 500 Index (FUSEX)
Vanguard Total Stock Mkt Index (VTSMX)
Schwab Total Stock Market Index (SWTSX)
Foreign developed equity Vanguard Total International Stock Index Fund (VGTSX) 0.22%
Emerging market stocks Vanguard Emerging Markets Stock Index Fund (VEIEX) 0.33%
Core Bonds iShares iBoxx $ Invst Grade Crp Bond (LQD)
Vanguard Total Bond Market Index Inv (VBMFX)
High-yield bonds Vanguard High-Yield Corporate Inv (VWEHX) 0.23%
Long-term bonds iShares 20+ Year Treasury Bond (TLT)
Vanguard Long-Term Bond Index Inv (VBLTX)
Global REITS Northern Global Real Estate Index (NGREX)
Schwab Fundamental Global Real Estate Idx (SFREX)

“Many plan sponsors offer free investment education to their employees, and that’s good place to start,” Tai says. “Don’t pay for things you can get for free.” Other experts say advisers can be useful to help people stay the course and not, say, panic and sell all their stock after a market crash. But all of the top advisers and economists NPR interviewed said you don’t want to overpay for a financial adviser.

2. Sample portfolio

30% Bonds
5% Real Estate

Stocks U.S. large cap: A term used by the investment community to refer to companies with a market “cap” or capitalization value of more than $10 billion. 25%
Stocks Foreign developed equity: Funds that invest in stocks from “developed” countries/markets outside the U.S. These include Germany, Japan, France, the U.K., Australia and others. 25%
Stocks Emerging market equity: Funds that invest in stocks in “emerging” countries/markets outside the U.S. These include Brazil, China, India, Mexico, the Philippines, Russia, South Africa and many others. 10%
Stocks U.S. small cap: Refers to stocks with a relatively small market “cap” or capitalization. The definition of small cap can vary among brokerages, but generally it is a company with a market capitalization of between $300 million and $2 billion. 5%
Bonds Core bond: Core bond funds typically provide investors with broad exposure to the investment-grade area of the bond market through investments in a wide variety of market segments (most notably, U.S. Treasurys, mortgage-backed securities and investment grade corporate bonds). Core funds are so named since the idea is that if investors owned only one investment grade bond fund in their portfolio, the core fund could essentially cover all the bases. 10%
Bonds High-yield bond: A high-paying bond with a lower credit rating than investment-grade corporate bonds, Treasury bonds and municipal bonds. Because of the higher risk of default, these bonds pay a higher yield than investment-grade bonds. 8%
Bonds Real return/TIPS: “TIPS” stands for Treasury Inflation-Protected Securities. A Treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the consumer price index, while their interest rate remains fixed. 8%
Bonds Long-term bond: The “long bond” is the 30-year U.S. Treasury bond. The long bond is so called because it is the bond with the longest maturity issued by the U.S. Treasury. Because it is backed by the full might of the U.S Treasury and has a low default risk, the long bond is considered one of the safest securities around. 4%
Real Estate Global REITs: A “REIT” is a Real Estate Investment Trust. It’s a type of security that invests in real estate through property or mortgages and often trades on major exchanges like a stock. REITs provide investors with an extremely liquid stake in real estate. They receive special tax considerations and typically offer high dividend yields. A global REIT invests in the U.S. and abroad in developed markets. 5%

Like Swensen, Tai advocates broader diversification than many individual investors often achieve.

3. Adjust your portfolio by age

Given the current interest rate environment, Tai believes that “a more flexible approach” to the traditional age-based rules to bond allocation might be more appropriate. So, Tai says her suggested portfolio is a good approach until you reach retirement age. At that point, she says, investors need to look at their nest egg: If it’s big enough to live on along with Social Security, “then it’s OK to reduce higher-risk assets such as stocks more quickly to 40 percent.” If you haven’t saved enough, the options aren’t so good. “[You] might need to postpone retirement,” she says.

Jack Bogle

Vanguard Group founder

1. Buy a stock index fund and own your age in bonds.

Bogle says to invest through low-cost index funds. (He created the first one after all.) With an index fund you’re not paying people on Wall Street to pick stocks for you. Instead, you basically “own all of corporate America,” he says — at least, a small slice. And over time, he says, low-cost index mutual funds outperform the vast majority of actively managed mutual funds. Picking winners with stocks is very hard to do, and for ordinary Americans, it just costs too much to invest that way, he says.

“Simplicity underlies the best investment strategies. Basic arithmetic works. Keep your investment expenses under control,” he says. “Your net return is simply the gross return of your investment portfolio less the costs you incur [such as sales commissions, advisory fees, transaction costs]. Low costs make your task easier.”

As for balancing risk and reward depending on your age, Bogle says: “Let’s start with the concept that when we’re young, have few assets, are willing to take risks, and seek capital accumulation, we should emphasize common stocks,” he says. “But as we age, our assets grow, we gradually become more risk averse, and increasingly seek income, we should emphasize bonds.”

One rule-of-thumb is to begin with a bond position similar to our age — 20 percent (or less) in bonds in our 20s, 80 percent bonds in our 80s — and then make adjustments based on your personal circumstances.

Bogle says he’s a fan of holding a mix of Vanguard’s Intermediate- and Short-Term Bond Index Funds, though of course similar low-cost funds are available out on the market from other firms.

He also suggests investing a portion of your bond allocation in tax-exempt funds if taxes are a concern. For example, Bogle personally uses a mix of Vanguard’s Limited-Term and Intermediate-Term Tax-Exempt Funds in his taxable accounts. If you’re saving for retirement though in a pre-tax 401(k) account, this isn’t a concern.

2. Factor in Social Security

Bogle says you can justify owning a larger portion of your assets in stocks if you consider that Social Security provides a revenue stream to you in retirement that’s safe and stable, much like the Treasury bond category is in your investment portfolio. So he says his basic “own your age in bonds” approach is a good starting point. But if you’re paying into Social Security with each paycheck, you can safely own more stock. So if you’re 28 years old, you might decide to have, say, 10 or 20 percent in bonds and 80 or 90 percent in stock — depending on your risk tolerance.

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