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Unconventional Success: A Fundamental Approach to Personal Investment Hardcover – Aug 9 2005
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Swensen, CIO of Yale University and the author of Pioneering Portfolio Management, reveals why the mutual fund industry as a whole does a disservice to the individual investor. Soft money, 12b-1 fees, overtrading, market timing, and other management practices lower performance and virtually guarantee that most mutual fund returns will fall short of their benchmark, such as the S&P 500. Furthermore, for-profit mutual fund companies have a fiduciary obligation to their stockholders, not to their investors, and this relationship "inevitably resolves in favor of the bottom line." Swensen is also highly critical of the Morningstar rating system, which only causes investors to chase hot performing funds and managers. He advises considering alternatives to the for-profit mutual fund industry, including Exchange Traded Funds and not-for-profit financial institutions such as Vanguard and TIAA-CREF. He highly recommends that as an individual, you should play a more active role in your financial future. This includes periodic portfolio evaluation and rebalancing, to ensure that your asset allocation remains diversified and suits your investment time line. David Siegfried
Copyright © American Library Association. All rights reserved
"Mutual fund managers and marketers are not going to like David Swensen's thoughtful and intelligently opinionated analysis of their 'colossal failure' resulting from the fund industry's 'systemic exploitation of investors.' Coming from the mind and heart of one of America's most successful and integrity-laden money managers, this is a book that will change the way you think about mutual funds. It's high time for you to follow the elegantly simple advice he presents in this wonderful book."
-- John C. Bogle, founder and former CEO, The Vanguard Group
"Swensen is the best. Always a pioneer, his new book presents an approach to investing that is both brilliant and practical."
-- Barton Biggs, former Chief Global Strategist, Morgan Stanley
"A legendary institutional investor reveals the conflicts of interest that induce most financial services companies to provide inadequate products for the individual investor. Swensen's wise solution: Low cost, tax efficient, market-mimicking funds available either through Exchange Traded Funds (ETFs) or from not-for-profit mutual fund companies. Unconventional Success does for the individual investor what Swensen's Pioneering Portfolio Management did for the institutional investor."
-- Burton G. Malkiel, author of A Random Walk Down Wall Street
"David Swensen is one of today's best endowment managers, if not the best. Unconventional Success is a perfect summary of what is wrong with a very important industry. This book should lead the reader to better investment decisions."
-- Michael F. Price, Managing Partner, MFP Investors
"Unfortunately, at the bottom of our industry -- money management -- there is a rather thick layer of muck, and Swensen's Unconventional Success rakes through this muck in spectacular fashion and great detail. It is the truth, the whole truth, and the very ugly truth. If you want to avoid the snares that lurk in money management, and save yourself lots of money, you must read it."
-- Jeremy Grantham, Chairman of GMO
Inside This Book(Learn More)
John Maynard Keynes wrote, "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally." Read the first page
Front Cover | Copyright | Table of Contents | Excerpt | Index | Back Cover
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In my opinion, the book is too academic for most retail investors and is perhaps more suitable for fee-for-service investment advisors. Since the book was written in 2005, the ETF landscape has become very cluttered and confusing but there are many well designed low cost ETF products.
As a criticism of the actively managed mutual fund industry, the book hits the bulls eye...Any article written by Jack Bogle (founder, Vanguard) will provide the same insight, but in a more concise and pointed delivery.
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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 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.
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).
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.
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.
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