David Swensen On Keeping It Simple

Keeping it simple. Building a diversified portfolio of low-cost investment vehicles like index funds and ETFs. Staying cool in the face of market turmoil by sticking to long-term asset allocation and re-balancing as necessary. Avoiding the urge to try and out-smart increasingly complex and competitive markets. These are the mantras about which I've written since first becoming a blogger, particularly with respect to retail investors that lack the resources, time and know-how to prudently invest in individual securities.

Some have other mantras, like chasing the hot stock of the day (read: Jim Cramer), which to me have always created a sense of false confidence in the hearts and minds of many retail investors. So I was quite happy to see one of the greatest long-term investors chime in at a time of awful market conditions to remind us all what really matters: keeping it simple, keeping costs low, staying diversified, staying focused. The investor: David Swensen.

From today's New York Times:

Don’t try anything fancy. Stick to a simple diversified portfolio, keep your costs down and rebalance periodically to keep your asset allocations in line with your long-term goals. That is the advice of David F. Swensen, who has run the Yale endowment since 1988, relying on a complex strategy that includes investments in hedge funds and other esoteric vehicles. The endowment earned 28 percent in its last fiscal year, which ended June 30, beating all other endowments. It finished the year with $22.5 billion.

For most people, he recommends a very basic approach: use index funds, exchange-traded funds and other low-cost instruments, and stick to your long-term asset allocation — even when the markets are in tumult.

Don’t be distracted by market forecasts, he said. “You have to diversify against the collective ignorance,” he said. “I think nobody is in a position to react to these big macro-issues. Where is the dollar going to be or what is G.D.P. growth going to be in China? For every smart person on one side of the question, there is another smart person on the other side.”

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“The only people who should get involved are sophisticated individuals who have significant resources and a highly qualified investment staff,” Mr. Swensen said.

“Most people do not have the resources and time to pick market-beating managers” of hedge funds, private equity funds or funds of funds, he said. And he said that the techniques used by hedge funds often result in higher taxes than those of index funds.

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He says it is fruitless for individual investors to pick stocks. “There is no way that an individual can go out there and compete with all these highly qualified and compensated professionals,” Mr. Swensen said.

HE criticized the approach of Jim Cramer, the CNBC host, who encourages investors to trade stocks in strategies that Mr. Swensen says cost heavily in commissions and taxes.

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Mr. Swensen says investors should forget market timing entirely. Once an individual sets up a program, it should be rebalanced quarterly or semiannually, he said, “but it should be disciplined.”

When the markets decline, try not to pay attention, he said. “Let yourself off the hook,” he said. “If you pursue the sensible long-term policy, look at it over a 5- to 10-year period. Don’t look at five months.”

“There is nothing that Cramer says that can help people make intelligent decisions,” Mr. Swensen said. “He takes something that is very serious and turns it into a game. If you want to have fun, go to Disney World.”

This is the way I invest. A 20-year markets professional. It is startling to see the language I've used to describe my thoughts on the topic and Mr. Swensen's: they are almost identical. And needless to say, our thoughts on Mr. Cramer are also completely in sync. The hardest thing about doing what both he and I suggest is plain to understand: humility and ego.

Why can't people be more humble about their investing abilities? Why can't they internalize the empirical research that clearly shows why mere mortals are doomed to fail as investors? Why must so many people have to find fun within investing, something which is, I'm sorry, at any time and always a serious business? In any event, if even one person reads this and changes their investment behaviors I'll be happy. Please, please, PLEASE - be careful out there.

Comments

[Tom B]

The flaw in the reasoning is that stocks are a winning game; throw darts at a stock table and you'll probably do better in the long run than bonds, CD's, or many mutual funds, if you watch your fees and shoot for long term capital gain over short.

[bcr]

Ultra low cost US equity ETFs such as SPY are not really diversified. Other major asset classes (commodities, real estate, foreign bonds, etc) are necessary to be truly diversified and if you want to hold these as a 'mere mortal' you are going to have to accept 0.75%+ fees

[Fred S]

This is a typical "don't dream of doing what we're doing" article by professional investors. It contains the usual mix of "you don't know what you're doing" along with contradictory advice of the "stick to your long-term goals", be "disciplined"... and "rebalance ever quarter". Having just said that mortals are unable to do any of these things intelligently without advisers, it seems strange to demand this kind of behavior. And remember "don't have fun"!

[Pesel]

Those guys are getting insider information. Our so-called professionals....total... corrupt...we could do their game if we tried.

[Pesel]

we couldn't do their game if we tried....Sorry for the typo.