Despite Losses, Star Investor Trusts In Stocks David Swensen, Yale's chief investment officer, says investors should stay the course and not follow their instinct to sell their holdings. The money that people are investing in the market today is buying stocks at prices that are far more attractive than 18 or 36 months ago.

Despite Losses, Star Investor Trusts In Stocks

Despite Losses, Star Investor Trusts In Stocks

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David Swensen stands on the trading floor at his offices at Yale in a file photo. Chris Arnold/NPR hide caption

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Chris Arnold/NPR

Jittery investors have been bailing out of stocks again. This week, the market has plunged to lows not seen in more than a decade. The Dow Jones industrial average is down more than 50 percent from its peak.

The United States is in the midst of a crash for the history books. Despite that, David Swensen, one of the nation's best investors, says it's important not to follow the urge to abandon the stock market.

Even The Best Investors
Are Losing Money

Swensen manages Yale University's endowment and has written a book on investing for average people. He has made billions of dollars for Yale. Over the past two decades, he averaged a 16 percent return every year. That makes him like the LeBron James or Tiger Woods of investing.

But even Swensen has taken some losses in the recession. Yale's endowment has fallen in value by about 25 percent. Swensen sums it up: "It's not fun."

But in a way, that's reassuring. If you're losing money, you're not alone. Even the best investors on the planet are losing money right now. Swensen is. Warren Buffet is.

But even with things looking as bleak as they are, Swensen says, it's really important not to lose your nerve.

Worries About The Future

Swensen gets some questions and phone calls these days from friends who are nervous. And he says he finds himself having to basically talk them down off a ledge from making big mistakes. One friend, he says, was getting pretty panicked as he nears retirement, and was on the verge of selling all of his stocks.

But first, he asked Swensen whether he should do that, or just grit his teeth and stay in the market.

Swensen told him he should stay in the market: "Oh, absolutely. In fact, you should be a lot more excited about the contributions you are making to your retirement plan today than you were about the contributions you made 18 or 36 months ago."

Swensen says the money that people are investing in the market today is buying stocks at prices that are far more attractive.

Staying In The Market

Swensen says our instinct is to sell when stocks fall. If something is hurting, you want to make it stop and get away from it. But, he says, "in the investment world, you have to have the exact opposite instinct."

The Dow has fallen more than 50 percent from its peak. Last month, it saw its biggest one month drop since 1933. And if you sell stocks now, odds are you'll be losing money on anything you bought over the past 10 or 12 years.

"When you buy high and sell low, it's a very, very tough way to make money," Swensen says.

It may not be this month, or this year, but Swensen says the economy will recover and the stock market will start rising again. So he says you just need to hang in there and not make any big changes to your retirement portfolio.

"Take a deep breath and relax," he says. "Don't panic."

Avoiding High Fees Through Index Funds

However, there is something really important that you can do, Swensen says: If you're not already in the market through index funds, he says you should sell your actively managed funds and buy index funds.

Index funds have very low fees because you're not paying anybody to pick stocks. They basically track the market as a whole, rising and falling the same way as, for example, the Dow does. Swensen says that if you're not a professional managing billions of dollars like him, it's almost impossible to beat these market indexes.

That's because most so-called actively managed mutual funds — the ones that pay managers to pick stocks — charge such high fees that the fees more than eat up the added returns they're able to achieve, he says. So, in effect, you're losing money by paying for this active management, Swensen says.

Swensen has done some research on this point. He and others have found the odds are 100 to 1 that you're better off in an index fund.

Swensen says that over 30 years or so, even people with average incomes would end up with hundreds of thousands of more dollars when they retire if they avoided the fees that many actively managed mutual funds and investment advisers charge.

As for his friend who needed advice, Swensen says he's put him in touch with a financial adviser at TIAA-CREF who is getting him into index funds. Swensen says TIAA-CREF and Vanguard are both basically not-for-profit fund companies and have much lower fees.