Originally Posted by otc
There isn't much in that article about the actual allocation (which makes sense...Yale's risk profile is probably constant over time while a 25 year old will want something different at 40) but the key is rebalancing.
Set a reminder in your calendar every quarter (or even just once a year) and do it. It might feel "wrong" to sell funds that have done well in exchange for sectors that have not...but if you don't do this, your asset allocation gets messed up (if you had kept a strict rebalancing regimen during the crash, you would have shifted more money into equities as the market went down which would have paid off when the market came back...if you had not rebalanced, you would have been hit hard by the crash and gotten nothing extra from the recovery).
If you are doing this retirement funds in an IRA or a 401k, you don't have to worry about the tax implications so you can trade like Yale and rebalance as much as you want (although trading fees will hit you in a self directed IRA...I use a broker with 3 free mutual fund trades each month which allows me to keep a balanced portfolio over time)
The recommended allocations are noted at the bottom of the article. However I'm not so sure about his daily rebalancing approach and how it might work for the small account investor. Consider that with a $50,000 account you would have $15,000 target allocation to the US equeties. Then 2% out of balance is only $300 for a trade and the trading costs could be $25 or so as it takes a sell and a couple of buys to reallocate. Also remember that Swenson has had a large allocation to "Alternative Investments" which are likely highly leveraged funds in LBO investments or hedge funds. So, while the leverage does not exactly show up in the investment chart, it is in there in a different form.
As to the rebalancing question, I did find a pretty interesting academic paper that looked at what the frequency should be. The conclusion was that rebalancing should not be based upon any particular time frame. The best approach was found to be waiting until the particular asset class was 20% out of balance from the target weight. At that point bring it back to only 10% out of balance, not to exactly the target weight. Something has caused the class to outperform (or others to underperform) and this method allows you to continue with the trend with a bit of overweight. This method would also give fairly infrequent trades and not increase trading costs that much. If you use the Faber approach and bi-weekly evaluations that that would be pretty easy to keep up with.
If you are running your own IRA you might look at Foliofn as a possible proker choice for running something like this. $250 a year for several hundred trades a month during the two daily window trade periods or $3 for market orders. There is a feature that will simply rebalance to the target weights and do the dollar amount calculations for you. You can hold partial shares so it gets pretty fine tuned on hitting the weights.