I was thankfully introduced to Mr. Swensen’s philosophy of investing early in my investing journey when I read his books Unconventional Success and Pioneering Portfolio Management. As someone who liked to focus on individual security selection, my biggest take away after reading these books was just how important asset allocation was compared to simply picking the right stocks. To put this in perspective, consider that going into fiscal 2021, Yale only had 2.3% of their portfolio in domestic U.S. stocks and their exposure to foreign equities was nearly fives times as much at 11.4%.
Given where we are at this stage of the market, I felt that it was appropriate to take a little break from idea generation/security selection and instead discuss portfolio construction. Bonds returns (at least for longer duration bonds) are inversely correlated to interest rates. With the rise in interest rates this year, bonds have been crushed after a nearly four decade bull market. This means that anyone that was using the traditional 60/40 portfolio (60% in equities and 40% in bonds) or even target date funds that automatically rebalance from stocks to bonds based on your target retirement date, has been hit hard this year.