Asset Allocation 101 According to David Swensen of Yale

In David Swensen’s “Unconventional Success” he covers asset allocation 101 touching on the topic of diversification and the importance of rebalancing, especially for beginners.

The following paraphrases from David Swensen’s “Unconventional Success,” There are core and non-core asset classes. Core asset classes have 3 critical characteristics:

1) they give basic, valuable differentiable characteristics to an investment portfolio. For example, while real estate protects against the effects of inflation, bonds protect against a financial crisis.

2) they rely fundamentally on market generated returns, not on active management of portfolios. In most asset classes, active managers do not outperform the market and because satisfying investment objectives is critical, a core asset class won’t rely on luck or serendipity,

3) they are derived from broad, deep, investable markets. As a core building block of a portfolio, we are focused on well-established marketplaces instead of trendy concoctions promoted by Wall Street financial engineers (ala all of the new ETFs currently coming out).

Non core asset classes fail to meet at least one of the three criteria above and usually depend upon active management. There are many alternatives here, but unless you have the expertise and the resources to find high quality active managers, these are not generally recommended.