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Review: Unconventional Success by David Swenson

I recently finished reading David Swenson’s Unconventional Success: A Fundamental Approach to Personal Investment. (For those unfamiliar with Swenson: he’s Yale University’s Chief Investment Officer.)

The book is broken down into three sections:

  1. Asset Allocation
  2. Market Timing
  3. Security Selection

Asset Allocation

The first section is a thorough run-down of each asset class, discussing various characteristics that make it either worthy or unworthy of investment. Swenson suggests a portfolio (one of my favorite “lazy portfolios” actually) consisting of 6 asset classes:

  • 30% domestic equity,
  • 15% foreign developed equity,
  • 5% emerging markets equity,
  • 20% REITs
  • 15% U.S. Treasury Bonds
  • 15% Treasury Inflation-Protected Securities

It’s good information, and I’m on board with his advice. The problem? This section of the book is boring, wordy, and repetitive. Given how engaging Swenson is as a speaker, I was disappointed.

Market Timing

The second section provides guidance on how to avoid behavioral investment mistakes. Specifically, Swenson warns against chasing performance and neglecting to rebalance your portfolio. Like the first section, it’s good advice, but not the most exciting reading.

Security Selection

Roughly halfway through the book and so far unimpressed, I was just looking forward to being done with it. Little did I know, this tamely-named section would be arguably the finest piece of investment industry muckraking I’d ever read!

In a degree of detail I’ve never seen before, Swenson highlights the various conflicts of interest between fund management companies and fund investors. I suspect that the majority of the information in this section will be eye-opening for most investors. I’m as cynical as they come with regard to the financial services industry, and there were a few moments when even I felt scandalized.

Recommended Read?

For a general introduction to investing, I’d recommend Bernstein’s The Investor’s Manifesto above this book. And in terms of avoiding behavioral investment mistakes, I’d suggest anything by Jason Zweig.

If, however, you’ve ever considered investing a portion of your wealth via actively managed mutual funds, I strongly recommend you read (the third section of) Swenson’s Unconventional Success. In all likelihood, it’ll convince you to stick with index funds and ETFs. But if it doesn’t, you’ll at least know what you’re up against (namely, the company managing your money on your behalf).

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Comments

  1. Swensen’s asset allocation is probably one of the better model’s out there. I’m personally more comfortable with a bit more international exposure and a bit less real estate.

    My favorite part of the book is when he talks about all the ways fund companies can screw over investors. Definitely the only place I’ve ever seen much of that information.

  2. Susan Tiner says:

    Mike, I had the same reaction to the first section and put the book down. Thanks for letting us know the last part of the book is a good muckraking piece, now I’ll definitely get back to it, that is after I finish the other 10 books I’m reading!

  3. Mike, would you like to do a review of Jim Otar’s “Unveiling the Retirement Myth”? Someone at Bogleheads suggested I read it, and it seems he’s recommending all kinds of things contra to the typical Boglehead philosophy – such as saying asset allocation and diversification are less important than luck of the market, that the optimal time to rebalance is every four years after each Presidential election, and more—including recommending annuities to anyone not in what he calls the “green” zone. Is there anything to this?

    I’d also appreciate your comments on the Coffeehouse approach, which seems to weight small and large cap, value and blend, domestic and international, almost equally.

  4. Hi Larry.

    Otar’s book has been on my Swaptree list for a while. I keep hoping to get it that way rather than shelling out $50 for it on Amazon. 🙂 I’ll refrain from making any statements either way until I’ve read it. (Though I’ll make an exception to go on the record as saying that annuitizing a portion of one’s portfolio can make a lot of sense if it’s the only alternative to an unsafe withdrawal rate.)

    Regarding overweighting small-cap and value stocks relative to their market weights, as mentioned here here, I’m inclined to think that it can make a lot of sense in terms of adding expected return without a precisely corresponding increase in volatility.

    As to U.S. vs. international, as discussed here, my own portfolio is roughly 50/50. However, it makes a lot of sense to me for an investor to scale back international allocation as he or she gets older.

    All that said, I think Schultheis put it well in his book: “As long as you own a broadly-diversified, low-cost portfolio of index funds, the ones you choose aren’t nearly as important as sticking with the funds you choose, especially when other index funds outperform the ones you own.” (Italics are his.)

  5. Mike, you can download a PDF of Otar’s book from his site for 6 bucks.

  6. Thanks for the heads-up! I had no idea.

    Unfortunately, upon downloading his sample chapter, it appears that on my version of Mac OS, the pdf doesn’t work properly. None of the graphs appear. (At least, I think they’re supposed to be graphs. Everything labeled “Figure 8.x” is just blank white space.) And the bottom of many pages appear to be missing.

    Darn!

  7. I really enjoyed the book. Swensen is dull in those early chapters, but I think that’s deliberate. He wants to make investing feel sober, rather than a shoot the lights out enterprise. I liked the way he cooly defused the case for say corporate bonds.

    That section you discuss is great. That unlisted property fund he rails against was a shocker!

  8. There are a lot of tables and graphs in the complete book, as well as case studies formatted within boxes. Perhaps you can get a download from someone with a PC and print it out (all 500+ pages, LOL).

  9. Monevator: Ah, the old “make the book boring on purpose” trick. I hadn’t thought of that! 😉

    Larry: Hah. I think the printer ink may surpass the $50 amazon price at that page count.

  10. Didn’t say he was concise.

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