The Investment Scientist

David Swensen gives four-point advice to individual investors

Posted on: January 7, 2009

This is based on an interview David Swensen done on Fox News Network.

david swensen

David Swensen

1. Have a strong decision-marking process

Investing success requires sticking with decisions made uncomfortable by the variance of opinions. In his own words:

Think carefully how it is that you are gonna allocate your assets and stick with it. Too many individuals were excited about the equity market 18 months ago and were despairing 3 months ago. It should have been the other way around. They should have been concerned about valuation 18 months ago and excited about the opportunity to put money to work at lower prices 3 months ago.

2. Sell mania-induced excess, buy despair-driven value

On his favorite area of despair-driven value, David Swensen has this to say:

I think the most interesting area is the credit market. Bank loans are trading at extraordinary low value. High-grade corporate debts, below investment grade corporate debts associated with companies that are gonna survive this are extraordinarily cheap. It’s not the only place to find value, but that would be the top of my list.

3. Make decision based on thorough analysis

Know where you belong …

There are two ends of the continuum in the investment market. You should be in one extreme or the other. There is no room for success in the middle. At one end of the spectrum, you get investors who committed resources to do high quality jobs in active management … At the other end of the continuum are purely passive investment vehicles – index funds. The vast majority of players are in the middle and the vast majority of players end up failing. Be at one end or the other and almost all investors belong to the passive end.

4. Watch out for the “fee-ing frenzy

This one should be obvious but ignored by many investors.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

1 Response to "David Swensen gives four-point advice to individual investors"

Reblogged this on The Investment Fiduciary and commented:

I wrote this article at the think of the financial crisis. I followed his advice and my clients were able to get back even before many other investors. My first client to get even was on Christmas of 2010. The overall market only gets back to pre-crisis level in January of 2013. Here is what I did:
1. Though it was extremely uncomfortable, I kept my clients on their asset allocation plans. In fact, we rebalanced into equity at the bottom of the market.
2. We rebalance out of the rallying treasuries to invest in tanking corporate bonds.
3. We know the limit of our intelligence, we just keep to our asset allocation plans.
4. We only invest in index funds and asset class funds. No actively managed funds.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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