on September 5, 2005
I am a graduate of the Yale School of Management (with a focus in finance) and have been a fan of Swensen's for a long time. Unconventional Success is, in my view, a must read for anyone who has to manage their own retirement assets (which is most people today).
Swensen compellingly makes the case that (a) the vast majority of passively managed funds outperform actively managed funds (after fees), (b) the vast majority of the mutual fund industry allows profit motives to trump their fiduciary duty to investors, and (c) an individual investor's financial assets are best managed by non-profit organizations - i.e., Vanguard or TIAA-CREF.
Swensen lays out six "core" asset classes that should form the basis of an individual investor's portfolio, each of which should comprise between 5% and 30% of the portfolio. Below is the "generic" target portfolio outlined in the book:
1. Domestic Equity (30%)
2. Foreign Developed Market Equity (15%)
3. Emerging Market Equity (5%)
4. Real Estate (20%)
5. U.S. Treasury Bonds (15%)
6. U.S. Treasury Inflation-Protected Securities (15%)
Swensen also discusses "non-core" asset classes and why each should not be a part of an individual investor's portfolio. These "non-core" asset classes include:
1. Domestic Corporate Bonds, 2. High Yield (Junk) Bonds, 3. Tax Exempt (Municipal) Bonds, 4. Asset-backed securities, 5. Foreign Bonds, 6. Hedge Funds, 7. Leveraged Buyouts, and 8. Venture Capital. We spent so much time in business school glorifying these assets that I found the rationale for why they have no place in an individual's portfolio quite useful.
The most valuable lesson in the book for me was the importance of "quarterly, semi-annual, or annual" rebalancing - i.e. selling winners and buying losers to move various asset classes back to long-term targets (taking into account the tax consequences for post-tax accounts). This is a basic lesson, of course, but the reminder was still highly valuable.
The book does have a few shortcomings. The book can be a bit technical and dry at times, especially if the reader has no background in finance. I would have also appreciated more discussion of how non-financial assets (e.g., home equity) and personal liabilities (e.g., student loans, mortgage), should impact portfolio allocation. Overall, however, I think anyone with a 401k or a few thousand dollars to invest will benefit from a thorough reading of this book.
I was fairly impressed with this book. I would give it an A, but the style of writing was painful to read, so I give it a B.
I recently saw several articles about Harvard's endowment manager leaving Harvard to set up his own firm. I was amazed to see how diversified the Harvard fund was in that it included not just stocks and bonds, but many other asset classes:
U.S. equities 15%
Private Equity 13
Hedge Funds 12
U.S. Bonds 11
Foreign Equities 10
Real Estate 10
Inflation-Indexed Bonds 6
Emerging Markets 5
Foreign Bonds 5
Borrowed Money -5
This info came from 12/27/04 Business Week article. The same article said Harvard's endowment fund grew from $4.7B in 1990 to $22.6B in 2005. This sounds impressive until you calculate the compounded return, which is 11.04%. Simply investing in an S&P 500 index fund over the same time period would have given roughly a 10.91% compounded rate of return.
Swensen seems to have followed a similar very diversified approach at Yale.
I really enjoyed the explanation of why certain asset classes should not be included in investor's portfolios.....specifically foreign bonds.
Since I am an avid Index Fund investor, Swensen was preaching to the choir with regards to blasting the "for profit" mutual fund companies. Being a Vanguard investor, I was disappointed to see Vanguard take one hit for following one type of unsavory practice. Compared to the "for profit" mutual fund companies, Vanguard is a shining angel.
The successes of Harvard's and Yale's endowment fund investments are spreading the gospel of the advantages of asset allocation. Gary Brinson's 1986 famous study can be defined as the birth of asset allocation. He found that over 90% of a portfolio's return can be determined by the asset classes used, not what the individual investments were. Brinson's findings have been relatively slow to flow through the investment community and to individual investors. Dial the time clock ahead from 1986 to 2006, and one of Business Week's cover stories seeks to explain why the S&P 500's profits have increased dramatically over the last 5 years, yet the S&P 500 companies have had very little stock price appreciation. One explanation offered is that more and more investors practice asset allocation and choose other investments besides the S&P 500 for their portfolios. The increased demand for other asset classes like foreign stocks, commodities, and gold has subsequently less to a decrease in demand for large cap stocks in the S&P 500.
This book contains excellent information and guidelines for serious investors. It is very dry and boring to read.
All-in-all, a good book for serious investors. I would suggest companion books to supplement this book including The Richest Man in Babylon, Bogle on Mutual Funds, The Millionaire Next Door, The 4 Pillars of Investing, A Random Walk Down Wall Street, and the Coffeehouse Investor.
on October 2, 2005
Written by one of the brightest and most successful money managers, the book has straightforward advice on what assets should makeup a portfolio and what assets (and providers) should be avoided. He definitely picks a few bones with the mutual fund industry which of course has been done before in such books as "The Intelligent Asset Allocator" by Bernstein and "A Random Walk Down Wall Street", corporate governance etc. As mentioned elsewhere he also goes into detail about the importance of rebalancing your portfolio.
1. Gives advice on companies which can be trusted and provide products and investments where the investors objectives are aligned with the products (stocks, etfs, government bonds etc).
2. Lists specific indecies and providers he favors over others. There are tons of etfs out there so it's helpful to see a list he likes. He goes into detail about why some are more efficient then others.
3. Straightforward writing and sections. Easy to skip things you may already know (e.g. most mutual funds should be avoided).
4. Written by someone whe has done this with great success himself.
1. Spends long sections in the book going into perhaps too much detail on specific examples of assets to avoid.
2. Regarding #1, I would have preferred more detail on specific allocations and products he likes and how we should use them best.
3. His own asset allocation at Yale includes a substantially different asset mix but he never gives detail on why Yale buys these things (e.g. Hard Assets) but individuals can or should not.
4. No advice on any sample portfolio.
5. Some mention of DFA would be nice.
In the end, I still prefer William Bernsteins "The Intelligent Asset Allocator" but this book is right up there and is one of the best I have read in years (and I have read most all of them).
on November 17, 2005
I used to read many investment books. There are many valid approaches to investing. One way, recommended by Peter Lynch and others, is to choose a diversified portfolio of individual stocks. Another way is to choose professional managers, and the easiest way to do this is through mutual funds. I chose a diversified portfolio of mutual funds. It has been a success.
However, there have always been aspects that have made me uncomfortable, and this book has forced me to realize that I have been paying a high price for my active management. And this book has forced me to face the hard question: the people who run my funds are without doubt winners in the game of finance, but I am not at all sure that they are making the 1 or 2 percent above market returns every year that justify that expense.
Some of the excellent points that are made: mutual funds often have hidden fees, such as kickbacks to brokers. And it is the shareholders who pay these fees (of course). Asset backed securities such as GNMAs may seem like conservative income choices, but how will they behave in extreme markets? As a product of complex financial engineering, nobody really knows.
He strongly embraces simplicity and low cost. He recommends the common sense solution of finding a money manager who is working for the client's interest instead of his own interest (which is often completely opposite the client's.) His basic recommendation is plain vanilla market index funds fun by non-profit institutions. It is awfully hard to argue with this reasoning.
At the very least, this book has prompted a look back at how my own funds have done versus how his recommended choices would have done.
No investment approach is right for everyone. But this approach deserves to be considered seriously.
on August 10, 2005
David Swensen has managed the Yale endowment portfolio for more than two decades now. Not only have his returns beaten the market, but they've beaten Harvard, Stanford, Princeton and pretty much every other peer portfolio in history. The remarkable thing about Swensen's success is that it is solidly grounded in clearly explainable financial theory. This is perhaps not surprising, since his mentor, James Tobin, won the Nobel prize in economics in large part for his theories of portfolio selection and asset markets. (Tobin was the last great liberal economist to win the prize).
What is really surprising is that Swensen wrote a book that brings this theoretical grounding to the practical world that confronts most personal investors. This book is largely about how individuals of modest (or not so modest) means can maximize risk-adjusted, after-tax returns on investment. A remarkable thing about his strategy is that it doesn't take a lot of time, effort or brains to follow it. It does take some courage (rebalancing by selling winning asset classes and buying losing ones is a key part of the plan), but it is easily accessible to anyone who even a few thousand dollars (in or out of a tax-advantaged account like an IRA) to invest.
Most reviewers focus on the indictment of the mutal fund industry, which is entertaining (if you can get over your anger at being victimized), but not the most important part of the book. The analysis of how the incentives of managers versus investors play out in various investment vehicles is quite illuminating, and a useful way to look at one's options.
Even if you don't care much about financial theory, and don't need to read an attack on the charletans of the investment industry, the clear, actionable and rational suggestions for what to do with your money are worth the price of admission.
on August 13, 2005
Swensen is a fabulous institutional investor, a really great and ethical guy, and a wonderful teacher (as a Yale alum I took his course a few years ago, and it was amazing). His prior book on institutional investing is a classic, describing his ground-breaking departures from conventional asset allocations into "absolute return" and other unconventional categories (alas, not generally available to you and me). This new book is good, and useful, but not particularly ground-breaking. Swensen's real expertise is in utilizing unconventional asset categories and finding unbelievable managers, in the institutional setting. He provides a service in exposing the mutual fund industry mess and recommending asset managers more distant from all that (and of course the importance of rebalancing)--but this isn't really news. Still, read this book. You cannot help but profit from it. BTW, "Toby's" review is worthless. As several other readers have pointed out, he gets most things wrong and the rest he doesn't get. Ignore him. For those interested, the Yale website has a lengthy article on Swensen and this book online at [...]
on September 5, 2005
This book is incredibly important for individual investors, as it not only highlights expensive mistakes to avoid, but also provides actionable strategies for investing that are especially valuable and easy to implement.
Swensen's sections on asset allocation, portfolio construction and rebalancing provide an easy-to-understand approach on why proper diversification is critical to success for any investor.
However, his in-depth analysis of the pro's and con's of each asset class is what separates this work from any other investment book I have ever read. It is in this area that this book pays for itself 100 times over.
For example, the author provides clear explanations on how and where to invest in U.S. equities, U.S. fixed income, international equities, real estate and cash. He also then provides insights, anecdotes and recommendations on other asset classes such as private equity, corporate bonds and venture capital that are at the same time valuable and shocking.
Swensen's short, detailed summaries at the end of this chapter add great value to the reader that is short on time, while the stories of abuses in the mutual fund industry (and implications for individual investors) glued me to the pages. Once I opened the book up I couldn't put it down.
Truly a great read.
on January 9, 2006
This is an extraordinary book written by an extraordinary fund manager that contains information that is of great interest to every investor. As more and more people take more and more responsibility for their own financial future (as more and more companies decline to provide pensions or health care), this information takes on critical importance.
There are two parts to this book:
1. An analysis of how individual investors should structure and manage their own portfolios.
2. An analysis of which securities to use to create these portfolios.
The portfolio suggested is the following:
Wilshire 5000 30%
Emerging Mkts 5%
US REITs 20%
US Govt Bonds 15%
The security choice boils down to Vanguard and the Federal Reserve with ETFs bought through AmeriTrade for a tax-efficient alternative to index funds.
In both parts of the book, analysis becomes expose.
Portfolio construction and management should follow well-known precepts such as (a) equity bias (b) diversification and (c) rebalancing. The expose is of the bad advice given by financial advisors and investors' propensity to ignore their portfolios until either greed or fear drive them to self-destructive behavior.
Active management is shown to be a failure in the long run, if not a fraud: data is presented that shows that in the 15 years from 1983 - 1998, during the greatest bull market in history - a period ending before the great dot.com collapse - 96% of actively-managed funds failed to beat the Vanguard S&P 500 Index Fund ... failing by an average of -4.8% per year. And the 4% who beat the index did so by a measly 0.6% per year.
The security selection expose details the extraordinarily self-serving and client-damaging behavior of the majority of the mutual funds pushed by financial advisors and brokerage companies. Vanguard, Longleaf, TIAA/CREF, AmeriTrade, State Street and Barklays stand alone among thousands of firms as being worthy of their clients' trust. Echos of Warren Buffett abound ("we eat our own cooking") but he is not explicitly mentioned.
The downside to this book is that it is hard to read. Both from the standpoint of a college writing course and because a good deal of financial-industry knowledge is assumed.
Notwithstanding the writer's style, this book represents a seminal event in the area of investor advice and should sit, dog-eared and well-thumbed, on every investor's, policy-maker's and regulator's bookshelf.
on November 10, 2005
This is a great book that goes through some fundamental investment choices that all individual investors should know. Swensen has much data to bolster his assertions, though people in the investment industry (other than low cost, investor-friendly firms like TIAA-CREF and Vanguard) would certainly bristle against his overt assertions of greed in the industry. I for one agree with him wholeheartedly, coming to it from years of my own independent, though not necessarily scientific, informal research. Very very worth a read. However, it is not the most exciting read and is a bit dry, unless you are fairly antiestablishment. For those who care enough to spend the time to not get fleeced, it is an important read. There are some new ideas (at least to me) about certain bonds/bond funds, and other "investments" being wholly unsuitable for individual investors that I had not previously appreciated. Swensen knows his stuff and seems to have serious ethics as well as no desire to run for elected office. Good for him. He seems to have the highest intellectiual and ethical standards and cares not for the majority of the financial services industry, which by my interpretation is largely parasitic.
on March 29, 2006
This is the best primer on personal investment strategy that I have read in the last ten years. Could only have been written by someone with Swensen's credentials who is totally unbeholden to the mutual fund companies and other financial services players who are systematically bilking small investors through high fee, high risk investment strategies that do not pay off for the investor in the long term.
Swensen's advice is sound, based on proven portfolio management principles, battle-tested via Yale's global endowment, one of the largest and most sophisticated investors of our time. The chapters on the proper use of ETFs- exchange traded funds- in a personal investment portfolio are worth the purchase price alone.
Of course, most investors will never take the time to read and reflect on a book like this--but you should! Just don't count on your mutual fund company to tell you about it!