Sunday, January 22, 2006

Unconventional Success - An ER Book Review

David F. Swensen is the manager of Yale's endowment. It's one of the largest in the world and, more importantly, it is considered the best run endowment. His ten year record of 16.8% for a fully diversified portfolio is unmatched.

Thankfully for us, he decided to write a book about personal investing. It's uninspiring cover art and uncreative title, Unconventional Success: A Fundamental Approach to Personal Investment, are it's two most glaring issues (I really think the cover and title are testaments to Swenson's un-flashiness and lack of gimmickry).

The book lays-out the following argument:
  1. Most investors rely on money managers (brokers, mutual funds, etc.) whose compensation systems are in conflict the the investor's objectives.
  2. Academic and real-world studied have shown that diversification, low fees and rigorous re-balancing are the three keys to investment success.
  3. Stock picking, market timing and chasing last year's 'hot hand' do not produce consistent results.
  4. There are six core asset classes that every investor should be exposed to in their portfolios: US equities, foreign developed equities, foreign emerging equities, real estate, US treasury bonds, US treasury inflation protected securities (TIPS).
  5. Every other available asset class (muni's, corporate bonds, mortgage bonds) are simply combinations (from a risk perspective) of the 6 core assets.
  6. You should use very low cost and tax-efficient ETF's or mutual funds to invest in the core asset classes.
  7. It is critical to re-balance (sell a portion of winners to invest in losers) to ensure you do not get too much exposure to a single asset class (think about the 2000 tech collapse).
  8. The vast majority (95%+) of mutual funds and some ETF's are a total scam. High fees, poor after-tax performance and a core misalignment of interests make actively managed mutual funds a loosing proposition for individual investors (he presents a ton of evidence supporting these claims).
  9. Vanguard and TIAA-CREF are non-profits and investors' best bets for ethical business practices w/ investors. He also mentions Long Leaf Partners and Numeric Investors as highly ethical mutual fund companies - I would add Hussman to that list.

This is a game changer for me. I've always known that I should have more of my portfolio in passive and diversified index funds, but nobody with Swenson's 'street cred' has built such a convincing case. I think I'll always play some stocks, I just need to segregate the vast majority of my portfolio to the side for a true asset allocation.

Read this book. It's a bit dry, but you'll be a better steward of your money for reading it. I'll leave you with one paragraph from the book where Swenson 'let loose' on full-service brokers:

The full service offered by full-service brokers generally impairs the investor's odds of success. Full service includes demonstrably worthless research. Full service encompasses clearly irrelevant broker advice. Full service costs materially more than other trading alternatives. Investors who employ full-service brokers pay a very real something for an extremely costly nothing.


At 11:19 PM, Anonymous Anonymous said...

What foreign fund would be a good Swenson choice? Should one use a European fund or one that includes the Pacific/Asian developed countries?

At 11:03 AM, Blogger Early Riser said...

Vanguard is always a good bet:
VDMIX for Developed Equity
VEIEX for Emerging Equity

At 4:55 AM, Blogger J.Klein said...

What I always suspected. Advice and analysis is worthless.

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