Duke Students on a Portfolio That Pays

Over the past year, I’ve been reading up on all kinds of investments and trying to determine where I can find some yield. So I enjoyed this New York Times story on Duke students who’ve come up with a “portfolio that pays.” The winning portfolio:

They were bullish on United States stocks, especially those of large companies, based on their predictions of a continuing recovery in housing, rising consumer confidence, strong retail sales and the continuing impact of the Fed’s quantitative easing program. They were also optimistic that Congress would avoid the so-called fiscal cliff and other threatened political calamities. But they were pessimistic about Europe and emerging markets, given the euro zone crisis and what they saw as slowing growth in countries like China and Brazil.

The team’s contest entry called for allocating 43 percent to United States stocks — 30.3 percent to a Russell 2000 index fund and 12.7 percent to a Russell 2000 fund that invests in midsize companies. They made no allocation to international stocks. Like more traditional models, they maintained a large allocation to fixed income, but weighted it heavily toward Treasury inflation-protected securities, or TIPS, whose yields rise with inflation. They allocated 32.1 percent to TIPS and 24.9 percent to an aggregate bond fund.

The result was a 9.7 percent projected annual return, with less volatility than the model funds they examined.

Personally, I think it’s a mistake they’re neglecting the international sector (especially emerging markets). I am also not as bullish on TIPS as these students. I do like the allocation to a more diversified Russell 2000 index than the broader S&P 500 index. Anyway, food for thought.

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