This is a considerable achievement, particularly considering the vast sums of capital that Swensen needs to deploy. He achieved these results by focusing extensively on moving away from the heavy allocation to bonds that the Ivy League had before the s. The book, instead, is aimed at small investors like myself. The book is geared towards small investors who want to set up a simple, passive portfolio that will preserve their wealth and give a decent rate of return over the long run. The Importance of Asset Allocation Asset allocation is a critical topic. It is especially crucial for the FIRE crowd.
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Treasury Bonds Foreign debt is often risky, especially in countries where the government is shaky. Swensen splits his fixed assets between regular treasury bonds and Tips Inflation protected bonds.
He sees REITS as long-term investments and certainly those who have invested in REITS several years ago will have to take a real long term outlook before they can recoup their investment. Swensen also sees stocks as a long term investment, although he warns not to be too sentimental over particular companies that you want sell when you need to rebalance. He realizes that most individuals have a hard time investing in individual companies.
Traditionally, the rule has been it takes at least 30 different stocks, diversified in various sectors of the economy, to reduce risk. The alternative, the Mutual Fund Industry, is also flawed and Swensen attacks the industry throughout this book.
He explores taxes on mutual funds and how when someone else sells their portion of the fund, it creates tax liabilities for all the fund owners. In the whole mutual fund industry, he only identifies three funds favorably. Over all, Swensen prefers index funds lower fees and lower turn-over of stocks which means less taxes.
Swensen warns against the practice of active management funds which try to beat the market, acknowledging that for every win, someone has to lose. Instead of trying to beat the market, he advocates maintaining a close what on ones asset allocations and frequently rebalancing. If the equity market rises, they sell and move it into fixed income. If the markets are down, they bring more money into equities. Such a strategy has enabled Yale to comfortably out perform the market in the long run, while avoiding the extreme highs and lows.
This book has political implication. He suggests that schemes like privatizing social security would be a windfall for the mutual fund industry and would not serve the individual investor. But if you want a deeper understanding of the investment industry, I would recommend this book. He seems to go overboard selling the idea that he mutual fund industry fails to serve the individual investor.
I look forward to reading his updated Pioneer Portfolio Management when it comes out in January. The second half quickly descended into a rant against the mutual fund industry. There are a few items of reasoning that did The first half of the book was great for asset allocation tips, clearly delineating various asset classes as to risk exposure and historical return characteristics.
There are a few items of reasoning that did not seem to make sense. For example, one of his premises is that fund size Assets Under Management is the enemy of performance. One might reasonably assume that this would apply only to actively managed funds and not to index funds for obvious reasons.
However, my experience has been that generally the greater assets under management accumulated by a mutual fund, the greater the difficulty in deploying those funds effectively, and thus the outlet is to buy large cap companies, which in turn realistically would engender a more index-like return minus fees and expenses, of course. His argument in the book is that security selection is almost always a detriment to portfolio performance, as Swensen claims that managers cannot consistently select companies that will outperform the market at large.
Thus, it would seem that the smaller the fund size, the more concentrated bets the manager would be able to make, and thus the likelihood of below average returns would increase. So, there is a bit of an apparent contradiction of premises among a few of the arguments presented. One of the most interesting facets is a chapter entitled "Winning the Active Management Game", which does nothing but provide a case-in-point example of a fund management company doing it "the right way".
Coincidentally, the funds performances are quite good, beating the associated benchmarks by hundreds of basis points over 10 and 20 year time-frames. Not only does Swensen bash active security selection, he also bashes active asset allocation, preferring that investors take historical returns and risk profiles of various asset classes as a strong indication of future dynamics.
As one may know, bond prices move inversely to prevailing interest rates; further, interest rates have just completed the greatest plummet in market history, with 10 year treasury yields falling from It would be patently foolish to believe that total returns on bonds will be anywhere near what they have been during this year time-frame.
For one that does not believe in active management, he and his cohort at the Yale Endowment appear to be doing a fine job of "actively managing" their funds. The takeaway invariably is that asset allocation and asset class risk exposure matter, and that Swensen would recommend low-cost index funds or well-constructed ETF vehicles for market exposure.
I recommend the individual investor read the first half of the book, glean some asset allocation advice from a superior endowment manager, and leave the second-half for the birds. Id recommend reading John C. Information packed, but a rather unnecessary book for the conventional investor. Much respect to the author who is one of the best modern-day investors but I feel this book was better articulated in say John Bogles Common Sense on Mutual Funds.
This book was designed for the mass market but even as a financial hobbyist this is waning.
Unconventional Success: A Fundamental Approach to Personal Investment
Yale University endowment[ edit ] Swensen was tapped to serve as the Yale endowment manager at age 31 in The letter asked them to consider the effect of their investments on climate change, and to refrain from investing in companies that do not make reasonable efforts to reduce carbon emissions. This method was characterized by Swensen as a more subtle and flexible approach, as opposed to outright divestment. Swensen called the editor-in-chief a "coward" for deleting an inaccurate sentence and removing a footnote in an op-ed that he submitted to the paper; his column, which he required to be published unedited, responded to a student teach-in that criticized companies allegedly in the Yale portfolio.
David F. Swensen
The David Swensen Asset Allocation
David Swensen’s portfolio (from Unconventional Success)