David F. Swensen was the mastermind, architect, and builder behind Yale University’s endowment fund. So yeah, it is safe to say he is an absolute legend in the investing world.
His sophomore book Unconventional Success was released in 2005, in which he took a contrarian stand against the mutual fund industry and described how (and why) it fails the average investor. The better part of two decades later, it is still a mainstay on my bookshelf.
Before I picked it up, I struggled to develop my own investing philosophy. I did what most do: max out the traditional forms of retirement savings (401k, IRA, etc.), then take the leftovers and put them into whatever real estate investments seemed best at the time.
These pages changed the way I viewed allocation strategy and holistic portfolio management. More importantly, they drove home the unparalleled importance of diversification, the foundational concept of everything we are building at Cira Capital Group.
Everyone wants to be a better investor, but not everyone has the time to study the complex concepts and apply them in real-time. I’ve pulled out my biggest takeaways from Unconventional Success below, but you can buy the full book here. If your goals include financial freedom and retirement security, these tips can help pave the way.
I’ve also incorporated these takeaways and more into our eBook: Broaden Your Horizon – Expand Your Portfolio. You can download a copy here.
Prioritize Asset Allocation
Swensen believed that investors’ returns are overwhelmingly driven by asset allocation decisions. He recommended picking equity-oriented asset allocations that are rebalanced often. By avoiding large asset allocation changes and market timing while holding a diversified portfolio, investors can achieve “Unconventional Success.” Ultimately, holding diversified assets is the best way to achieve stable returns with the least amount of risk.
Focus on the Long-term
Swensen also emphasized the importance of a long-term focus, which ultimately means deprioritizing short-term liquidity. He believed that by accepting—no, embracing—illiquid alternative investments (like real estate syndications), investors could achieve higher returns. And by regularly investing in illiquid investments, they are prevented from making rash decisions to sell during market panics.
During economic or market turbulence, Swensen noted just how imperative it is to stick to your asset allocation strategy. If you rebalance your portfolio often, you are naturally buying assets that are undervalued and selling assets that are over-valued.
If you take the emotion out of your decisions and trust that your investments will outperform over the long run, you can take advantage of incorrect pricings in the market. In other words, go against the market by buying the out-of-favor assets and selling “the flavor of the day” to keep your asset allocation consistent and in balance.
If striving for Swensen-level success, discernment is key. Be selective when choosing an investment manager (or sponsor). Seek low-fee options when available. But most importantly, perform extensive due diligence, get a range of opinions, and cross-reference the facts as much as you can.
I think more and more people are moving toward the low-fee model of passive index investing in the stock market, which results in diversification to some extent. However, investors are not applying the same thought process to their private investments. For example, when people invest in private real estate syndications, they often can only invest in a few. This concentration is risky. Investors should seek out more diversified real estate investments, such as fund of funds, to protect against downside losses.