The NPR radio program On Point had a guest today from the investment world -- David Swensen, the man who has managed Yale's endowment for the past 20 years (returning 16% on average per year during that time). He had some interesting opinions about the mutual fund industry, and how ordinary investors should handle their own investments.

While soft-spoken, Swensen had a lot of harsh words for the mutual funds industry. Fidelity Observer has touched upon lots of the same things here before -- for instance, deceptive marketing from Fidelity and others -- but Swensen took his attacks to other areas as well. The poor record of active fund managers in aggregate compared to the S&P index is well known, but he didn't just blame poor stock selection -- he says managers have abandoned their fiduciary responsibilities to individual investors, in favor of their own profit motives. He said the Morningstar "star" system is garbage, as it is only based on past performance.

Swensen distilled some advice from his new book, Unconventional Success : A Fundamental Approach to Personal Investment. Three highlights:

1) Stick with index funds

2) Buy index funds through non-profit companies like TIAA-CREF or Vanguard, which have the lowest fees and don't have the same profit motive as for-profit fund companies. Someone asked him about buying low-fee index funds through Fidelity, but he seemed to believe that for-profit companies might do a variation of the bait and switch -- heavily market how much they have reduced fees, and then a few years down the road quietly tack on new costs or fees.

3) Balance your portfolio according to this formula:

15% US Treasuries
15% Inflation-protected securities
30% Domestic stock index fund
15% Diversified foreign stock fund
5% Emerging markets fund
20% Real estate (!)

His advice was to get index funds for the majority of these categories, including Real Estate -- he suggested a REIT-tracking index fund. Swensen also told people to rebalance their portfolios regularly to stay within these parameters.

All of Swensen's advice is explained in detail and backed up by data (or so he claimed on the radio program) in his book, Unconventional Success : A Fundamental Approach to Personal Investment.mortgage calculator