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Swenson on diversification, indexing, myths
[Download Printable Proof PointTM]
Speaking of great universities and stellar investment
performance, here are several compelling points from
David F. Swensen, legendary chief investment officer of
the Yale endowment, which has averaged returns of
16% over two decades. These proof-points are culled
from Swensen's book, Unconventional Success:
The for-profit mutual fund industry, with its excessive
fees (both stated and hidden) and its constant "churning"
of portfolios, does the average investor irreparably more
harm than good.
If one aggregates all returns for all actively-managed
stock portfolios over a given time frame, the combined
results inevitably mimic performance of the market as
whole, less the fees one has paid to "play the game."
The only proven blueprint for sustained success is an
exceedingly well-diversified, equity-oriented and
passively-managed (index-model) portfolio.
Market timing is a dangerous myth: it relies on a
bewildering array of unknowable macro-economic and
financial variables.
100% of investor returns derive from asset allocation;
individual stock picking and marketing timing is
inconsequential.
"Mirror" investing – chasing yesterday's winners – is
what cripples most investment programs.
"Mimic" investing (i.e., indexing) and diversification
allows investors to achieve consistently higher returns
relative to risk. The great Nobel laureate
Harry Markowitz called diversification one of the
economic world’s rare "free lunches." It provides risk
reduction without a corresponding return diminution.
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