There is a really great piece from NPR about David Swensen, and how he managed to grow Yale’s endowment at an average of 16.8 percent a year over the past two decades. Swensen’s basic formula for creating an investment portfolio for good returns while managing risk:
- Domestic Equity (30 percent) - Stocks in U.S. based companies listed on U.S. exchanges.
- Emerging Market Equity (5 percent) - Stocks from emerging markets across the globe. Brazil, Russia, India, China, etc.
- Foreign Developed Equity (15 percent) - Stocks listed on major foreign markets in developed countries, such as the UK, Germany, France, and Japan.
- REITs or Real Estate Investment Trusts (20 percent) - Stocks of companies that invest directly in real estate through ownership of property.
- U.S. Treasury Notes and Bonds (15 percent) - These are fixed-interest U.S. government debt securities that mature in more than one year. Notes and bonds pay interest semi-annually. The income is only taxed at the federal level.
- TIPs or U.S. Treasury Inflation-Protection Securities (15 percent) - These are special types of Treasury notes that offer protection from inflation, as measured by the Consumer Price Index. They pay interest every six months and the principal when the security matures.
Some words of wisdom from the man himself.
On investing in scary economic times…
“The human tendency in this kind of environment is to do something — to make a change,” he says.
Stocks seem risky, especially since they’ve been falling. Swensen says most people he talks to get nervous and want to sell stocks.
“And that’s exactly the wrong reaction,” he says. “Buying high and selling low is not a way to make money. It’s not hard, right? It’s very simple: You want to do the opposite.”
On paying for financial advice…
Investment services provide pretty mediocre advice, and it’s just not worth giving them a percentage of your life savings.
“That’s the wrong path,” Swensen says. “And the reason it’s the wrong path is it’s a very, very expensive path.”
On index funds vs. mutual funds…
Fees are also the big reason you should buy index funds instead of classic mutual funds. Index funds, which track market segments like the S&P 500, are a lot cheaper.
Swensen says the vast majority of professional mutual fund managers fail to beat those indexes.
And finally, on rebalancing your portfolio…
Swensen says people should rebalance their retirement accounts at least quarterly — four times a year. He says the technique is a disciplined way to buy low and sell high over time. It also keeps your risk profile where you want it to be.
Something you should keep in mind though, is that rebalancing can create tax liabilities. One way to avoid that is to do rebalancing only in the tax-deferred portion of a portfolio. New contributions may also be used as rebalancing tools, so that investors sell fewer existing investments.
If you go HERE, you can read the full article and listen to the segment. It goes into detail about his rebalancing techniques, how he has managed Yale’s endowment, and gives some investment ideas. If you have some time I would definitely check it out.