Yale's Money Guru Shares Wisdom with Masses In the 21 years he's managed Yale University's investments, David Swensen has made an average 16 percent annual return — better than any portfolio manager at any university. Now he's teaching individual investors how best to save for retirement.

Yale's Money Guru Shares Wisdom with Masses

Yale's Money Guru Shares Wisdom with Masses

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David Swensen stands on the trading floor at his offices at Yale, where he and his team of 20 analysts work. Chris Arnold, NPR hide caption

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Chris Arnold, NPR

More Tips from Swensen

Where to Put Your Money

The chart below represents Swensen's basic formula for creating an investment portfolio likely to give you good returns while still managing risk:

Swensen's recommended formula
  • Domestic Equity (30 percent): Refers to stocks in U.S.-based companies listed on U.S. exchanges.
  • Emerging Market Equity (5 percent): Refers to stocks from emerging markets around the world, such as Brazil, Russia, India and China.
  • Foreign Developed Equity (15 percent): Refers to stocks listed on major foreign markets in developed countries, such as the United Kingdom, Germany, France and Japan.
  • Real Estate Investment Trusts (20 percent): Refers to 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.
  • U.S. Treasury Inflation-Protection Securities, or TIPS (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.

Want More Details?

Vanguard is one of the few major nonprofit mutual-fund families. To help people understand exactly what he's suggesting, Swensen picked a few Vanguard funds to consider. Swensen is in no way affiliated with Vanguard.

  • Domestic Equity: Vanguard Total Stock Market Index Fund (VTSMX)
  • Foreign Equity: Vanguard Total International Stock Index Fund (VGTSX)
  • Emerging Markets: Vanguard Emerging Markets Stock Index Fund (VEIEX)
  • REITs: Vanguard REIT Index Fund (VGSIX)
  • Government Bonds:

— Vanguard Short-Term Treasury Fund (VFISX)

— Vanguard Intermediate-Term Treasury Fund (VFITX)

— Vanguard Long-Term Treasury Fund (VUSTX)

  • TIPs:

— Vanguard Inflation-Protected Securities Fund (VIPSX)

Scroll down for more investing tips from Swensen.

Yale University recently announced a 23 percent return on its investments, swelling its endowment to a whopping $18 billion. The man behind that investment success is David Swensen, one of the most gifted investors in the world. He's made an average 16 percent annual return over 21 years — better than any portfolio manager at any other university.

Nobody has numbers that good. Not at Harvard, Princeton, Stanford, or any foundation or pension fund; Swensen consistently beats them all. And recently, Swensen has become passionate about trying to teach individual investors how best to save for retirement.

For a long time, universities invested in a plain-vanilla mix of stocks and bonds. Swensen helped change that. He has built a portfolio with stakes in venture capital funds, real-estate partnerships, emerging market stocks and scores of small, specialized investment outfits. Any tiny market movement changes the balance of the whole thing.

So how does Swensen keep track of it all?

"I have a calculator," Swensen says with a chuckle. "And then I talk to one of my colleagues, who executes the trade. So it's decidedly low-tech."

He also has a nice computer with two flat-panel monitors on his desk, which sits in the middle of the small trading floor where he and his team of 20 analysts work. The monitors show the value of Yale's investments by category. Swensen says he could use automated software to help him balance the numbers each day, but that would take all the fun out of it.

The Billion-Dollar Man

Swensen, 52, is an unassuming, affable Midwesterner. He could easily pass for a friendly high-school math teacher or a town pastor. But he makes more money than they do. Yale pays Swensen $1.3 million a year. That sounds impressive until you realize that, with his track record, if Swensen started his own hedge fund, he could earn $50 million to $100 million a year.

But Swensen would rather work for Yale, where he earned a Ph.D. in economics. He spent five years on Wall Street and then, 21 years ago, agreed to return to lead Yale's investment office.

"I had a great time on Wall Street, but it didn't satisfy my soul," he says. "And I've always loved educational institutions. My father was a university professor, my grandfather was a university professor. So there must be something in the genes."

Swensen teaches a course at Yale in which he airs his unorthodox view of the basics of a well-diversified portfolio. He argues that, by owning not only stocks and bonds but also holdings in real estate, timber, oil and gas, and other investments, you can get strong returns with less overall risk.

A few years ago, he decided he wanted to spread his message to more people. So he wrote a book, Unconventional Success, with advice for the average investor. Swensen warns there's no "one-size-fits-all" approach to investing. But if you want to follow his advice, he shares some basic tips below.

David Swensen's Advice for the Individual Investor

Swensen shares more investing advice in his book Unconventional Success. hide caption

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Beware of the Mutual Fund Myth: Many Americans seem to like the idea of pooling their money in an actively managed mutual fund -- where, presumably, a professional money manager can invest it better than they could themselves.

But Swensen says that doesn't work. He says for-profit mutual funds have an inherent conflict of interest. They make money by charging fees that suck profits away from investors in the funds. In fact, over time -- when you factor in the fees, taxes and other costs -- he says your odds of beating the market in an actively managed fund are less than one in 100.

Most mutual funds get far too big and own far too many stocks, Swensen says. In Unconventional Success, he writes that, when a fund is holding 30 to 50 stocks or more, the odds become very likely that the fund will start to track its broader market category. Stock picking becomes less important as the winners and losers in the fund average out much like the broader market. So why pay someone a lot of money to pick stocks?

He says mutual fund investors also lose from commissions and market impact associated with all the churn -- that is, the buying and selling of stocks in the fund.

Invest in Nonprofit Index Funds: Since at least 99 percent of mutual funds aren't going to beat the overall market, Swensen says individuals should invest in nonprofit funds that track market segments, such as the S&P 500. There are a range of index funds that track the U.S. domestic stock market, international markets, emerging markets and the real-estate market.

Swensen says mutual funds that are organized on a not-for-profit basis don't have the same conflict of interest as for-profit funds, and they charge lower fees.

The fees are even lower with nonprofit index funds, because you're not paying money managers to research stocks and buy and sell them. The fund simply holds all the stocks listed in that index. And because well-structured index funds have low churn (turnover), they are remarkably tax efficient.

Pick the Right Investment Mix and Keep Your Money There. Don't Move It Around! Swensen says that individual investors will make the greatest return by focusing on the right way to carve up their portfolio into different areas of investment (see the pie chart at top left). He says they should then stick with that mix.

Don't, for example, try to decide when to buy U.S. stocks and sell a lot of bonds, in an effort to predict which way those markets are heading. If you do that, he says, you're going to lose over time, because you'll be competing directly with professionals like him.

Swensen has a team of 20 analysts -- and a small army of boutique investment houses -- working long hours to predict which way certain market segments or individual stocks will move. Who do you think is going to buy and sell at the right time? Remember: If somebody buys low and sells high, somebody else is buying high from them. You don't want to be that person.

Rebalance Your Portfolio: Swensen rebalances his portfolio at Yale at least every day, and often many times throughout the day. What does that mean?

Let's say U.S. stocks go up 2 percent one afternoon, while international stocks decline by 1 percent. If you have holdings in both areas, the percentage of your portfolio that's in U.S. stocks has grown a bit, and the foreign-equity portion has shrunk a little. Over time, this process can really change the face of your portfolio -- especially if you continue to reinvest your earnings, or make contributions to a 401k or 403b, without ever rebalancing.

So, Swensen says, you need to regularly rebalance your holdings to keep them steady. That way, when the value of foreign stocks or emerging-market stocks rises, you'll own more of them -- and will make more money -- if you rebalanced while these stocks were cheaper.

Adjust Your Portfolio as You Near Retirement: As you get older and closer to retirement, it's obviously important to have enough money in less risky, more predictable investments.

But rather than changing all the numbers on your "asset allocation" pie chart depending on your age, Swensen prefers to think about this question in a way that's easier to grasp. He says as people age, they can keep their investment portfolio set up the way it always has been. But they should start to move money out of it, across all investment categories proportionally, and transfer the money into an account that's invested in money-market funds or short-term, inflation-indexed bonds.

-- Chris Arnold

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