David Swensen's Words of Wisdom

(MoneyWatch) 

David Swensen has been the chief investment officer of the Yale Endowment since 1985. At the end of 2008, the endowment was the second-largest higher education endowment at about $17 billion. Kevin Grogan, my colleague at Buckingham Asset Management, passed along an interview Swensen gave to the Financial Times last week. Although he's an institutional money manager, individual investors would be wise to follow his advice:

Market Timing
"Ultimately, market timing is an exercise in futility. When you've got dramatic movements in the markets you can identify after the fact a handful of investors that succeeded in the short run. But making big, aggressive asset allocation moves isn't a strategy that's likely to prove successful in the long run."

Index Funds
"The overwhelming number of investors, individual and institutional, should be completely in low-cost index funds because that's easy to understand."

Swensen's Most Important Investing Advice
"You should only invest in things that you understand. That should be the starting point and the finishing point." For most investors, this means avoiding complicated alternative investments like equity-indexed annuities, structured investment products and hedge funds.

The key to investing is relatively simple and almost boring. Determine the asset allocation that matches your ability, willingness and need to take risk. Then, implement this asset allocation using passive investments that are easy to understand. If you follow this simple advice, you'll be well ahead of many investors.