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.
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Yale's Money Guru Shares Wisdom with Masses

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Yale's Money Guru Shares Wisdom with Masses

Yale's Money Guru Shares Wisdom with Masses

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Yale University is not wrong very often about its investments. It just rang up a 23 percent return. That sent Yale's endowment up to a whopping $18 billion. The man behind those investments is David Swensen. At Yale his gains have averaged 16 percent over 21 years. Those numbers can't be matched. Not at Harvard, Princeton, Stanford or any other foundation or pension fund. Swensen recently has taken up the cause of the individual investor.

NPR's Chris Arnold has this profile.

CHRIS ARNOLD: For a long time, universities invested in a plain vanilla mix of stocks and bonds. David Swensen has helped to change that. Swensen has built a complex portfolio with major stakes in venture capital funds, real estate partnerships, emerging market stocks, you name it. Any tiny market movement changes the balance of the whole thing.

So how does he keep track of it all?

DAVID SWENSEN: I have a calculator. And then I talk to one of my colleagues, who executes the trade. So it's decidedly low tech.

ARNOLD: Swensen also has a nice computer with two flat panel monitors on his desk here in the middle of the small trading floor where he and his team of 20 analysts work. It shows the value of Yale's investments by category. Swensen could use automated software to help him balance the numbers each day.

SWENSEN: Yeah, but that would take all the fun out of it.

ARNOLD: Swensen, who's 52, is an unassuming, affable Midwesterner. He could easily pass for a friendly high school math teacher or maybe a town pastor. But he makes a lot more money than they do. Yale pays Swensen $1.3 million a year. With his track record, if Swensen wanted to go start his own hedge fund, he could probably make 50 or $100 million a year.

SWENSEN: I suspect that's within the realm of possibility.

ARNOLD: But Swensen would rather work for Yale. He got his Ph.D. in economics here, spent five years on Wall Street, and then 21 years ago agreed to come back to head-up Yale's investment office.

SWENSEN: And look, I had a great time on Wall Street, but it didn't satisfy my soul. 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.

ARNOLD: Swensen teaches a course at Yale, where he talks about his investment strategy. He argues 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. And a few years ago, he wrote a book called Unconventional Success to Help Average Investors.

SWENSEN: And the initial thought was that I could find investment alternatives that individuals could tap into to essentially mimic what we have done at Yale.

ARNOLD: That would be nice. But unfortunately, Swensen says the project turned into an education in how bad the options are for the average investor. The heart of the problem, he says, is the mutual fund industry. Many people like the idea of actively managed mutual funds, pooling their money with other investors for a professional to invest better than they ever could. But Swensen says it doesn't work out that way.

SWENSEN: My friends tease me about the fact that I get very passionate this. And I think that one of the reasons is that I spent my career at Yale trying to be a good fiduciary for the university. And then to look at the for profit mutual fund industry and see a total lack of fiduciary responsibility to the individual investors was very upsetting to me.

ARNOLD: Swensen says mutual funds have an inherent conflict of interest. They make money by charging fees that suck profits away from the average investors in the funds. In fact, over time when you factor in the fees and other costs, Swensen says you have almost no chance of beating the market in an actively managed fund.

SWENSEN: I think the chance is virtually nil.

ARNOLD: But Swensen says there is hope. He says the solution is to buy into cheap, nonprofit index funds which track fixed sectors of the market, like the S&P 500. Then he says diversify and stick with your investment mix. Don't try to pick short term winners.

SWENSEN: The mutual fund industry has done a terrible job, but then individuals take this lousy set of choices and then they make bad decisions on top of that. And the most frequent bad decision is that they buy something after it's gone up and then they sell something after it's gone down.

ARNOLD: In its defense, the mutual fund industry's main trade group says investors are picking funds with lower fees these days. But if you're thinking of taking Swensen's advice, you might be wondering how he'd suggest you divide up your investments.

SWENSEN: You know, each individual is unique and so there's no one size fits all, but I thought saying that would kind of be ducking the question, so I came up with a suggestion that people could look at. It's 30 percent in domestic stocks, 15 percent in foreign developed stocks, 20 percent in real estate investment trusts.

ARNOLD: If you are scrambling around for a pen to write this down, don't worry it's at NPR.org, along with other financial tips from Yale's David Swensen.

Chris Arnold, NPR News, Boston.

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