The Core Assets for Any Portfolio


While each portfolio is different and customized, there are some solid assets that everyone should be investing in, no matter there goals. Take a look at what David Swenson from Yale considers to be the 6 best assets for any portfolio.

We’re told that investing in the stock market is complicated. Only the professional money managers can help us navigate the alphabet soup of stock tickers and esoteric products like derivatives, CDOs and default swaps. They want you to throw up your hands and pay them a fee to help you make sense of the mess (that they created)! How convenient for them.

In reality, it’s not nearly that complicated. David Swensen, investment manager of the Yale University Endowment Fund, thinks individual investors should invest in a well-diversified portfolio of low-cost index funds. Yale has long had one of the most successful endowments among the major colleges. It’s success seems to be a factor in pushing Harvard to abandon its model.

Sometimes it’s easy to get confused by the all the options (even in the “index” fund world). It’s like walking into a Whole Foods trying to buy jam. There’s 60 different flavors! You’ll throw your hands up and leave empty handed. Maybe Whole Foods should start hiring personal shoppers that can lead you the jam that’s right for you.

Or you could just get strawberry.

In his book Unconventional Success, Swenson outlines what he calls the six core assets of a portfolio. It’s a great reminder that underlying all the complexity of investment options are only a few major asset classes.

If you’re looking to build a portfolio, you could do a lot worse than picking an allocation among these asset groups. I also took the opportunity to select a few funds that represent each category. If I were putting together a portfolio, these funds would be the starting point for my evaluation.

Domestic Equities

This is the US Stock Market. Investing in domestic equities means you’ll mainly be exposed to the US economy but keep in mind that many US companies are global enterprises. Domestic equities are probably the most familiar asset class to investors. It means owning a piece of corporate America.

If you own domestic equities, you’ll take advantage of the following: (1) equity risk premium and (2) inflation protection, Equity risk premium is the extra return you expect to receive for taking a risk on equities as opposed to bonds. Investors expect equities to include inflation protection because as prices inflate, companies are well positioned to capture the additional returns themselves through an increase in the price of products sold and an increase in the value of assets owned.

Example funds for this asset class:

Foreign Developed Equity

Swenson breaks up international investments into “developed equity” and “emerging market”. He believes that “developed equity” markets can be expected to provide similar returns to the US domestic equity market without the correlation. Developed equity markets consist of countries like the United Kingdom, France, Germany, Japan, Australia, etc. I found it a little harder to locate funds that take this approach to international markets. Let me know if you’re aware of any in the comments and I’ll update the post.

Example funds for this asset class:

Emerging Market Equity

The “emerging markets” funds are the other half of the foreign equity markets. Swenson argues that these are high-risk and high-reward investments since they rely on the growth in developing countries. There are many examples of emerging markets that have become “submerged” markets (Swenson uses Serbia as an example).

Example funds for this asset class:

US REITs

Real estate investment trusts (REITs) have been around since the 1960s and are primarily a way to allow small investors exposure to the real estate market by aggregating the capital required to purchase properties and the management responsibilities among a large shareholder base. REITs also receive special tax treatment as long as they invest in real estate and pay out 90% of its dividend income each year to shareholders.

Example funds for this asset class:

US Treasury Bonds

Owners of US Treasury Bonds own a portion of the public debt of the United States government. Often considered the “gold standard”, the chance of the United States defaulting on its debt is low but not non-existent. If you purchase US Treasury Bonds, you’re essentially lending to the federal government. Getting paid back by the federal government is considered significantly less risky than making money as an equity holder in a corporation, so returns are correspondingly lower for such lenders.

Example funds for this asset class:

US TIPS

If you invest in US Treasury Bonds, you’re dealing with nominal dollars. You lend $1,000 and you’re paid back some percentage of the bond that represents the interest rate. This may make sense if you’re concerned with nominal returns yourself (such as generating enough income to cover certain expenses). Other investors are looking for protection against inflation. US Treasury Inflation Protected Securities (TIPS) are specific treasury securities that are indexed to inflation (i.e. the Consumer Price Index), plus some type of additional return. I always thought MyMoneyBlog did a good job of keeping track of inflation-indexed rates if you’re interested in learning more.

Example funds for this asset class:

Let’s talk about it. Do you have any of these core assets in your portfolio?

Joshua Holt

Joshua Holt A practicing private equity M&A lawyer and the creator of Biglaw Investor, Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He spends 10 minutes a month on Personal Capital keeping track of his money and his latest deal involved purchasing office space on the EquityMultiple real estate crowdfunding platform.

Save more money than your friends

The Biglaw Investor email list covers personal finance, financial independence, investing and other stuff for lawyers that makes you better. Join us and get ahead of your co-workers.

    Leave a Reply

    Your email address will not be published. Required fields are marked *