📖David Swensen

Rebalancing Discipline

🌿 Intermediate★★★★★

Rebalance systematically back to target allocations to maintain risk-return profile.

💬

When markets move, rebalance back to target allocations. This forces you to buy low and sell high systematically. Rebalancing is contrarian by nature.

— Pioneering Portfolio Management，2000

🏠 Everyday Analogy

A process is like a pilot checklist: discipline prevents simple mistakes when pressure rises and keeps outcomes more repeatable.

📖 Core Interpretation

Systematic rebalancing creates value through disciplined mean reversion
💎 Key Insight：Market movements cause portfolio allocations to drift from targets. Swensen advocates disciplined rebalancing—selling appreciated assets and buying depreciated ones—to restore the intended risk-return profile. Rebalancing enforces buy-low, sell-high discipline and prevents overconcentration. It should be rules-based (triggered by thresholds or calendar) rather than discretionary to avoid behavioral biases.

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❓ Why It Matters

Rebalancing fights human tendency to chase winners and sell losers

🎯 How to Practice

Set target allocations and rebalance when positions drift significantly

🎙️ Master's Voice

Alternative assets can reduce overall portfolio risk when properly implemented.
Swensen pioneered institutional allocation to alternatives: private equity, real assets, venture capital. These provided returns uncorrelated with public markets, improving risk-adjusted performance.

⚔️ Practical Guide

✅ Decision Checklist

  • Do I have exposure to alternative assets?
  • Are my alternatives truly uncorrelated?
  • Can I access quality alternative investments?

📋 Action Steps

  1. Consider alternatives for diversification
  2. Ensure alternatives are truly different from public markets
  3. Access alternatives only through quality managers

🚨 Warning Signs

  • Alternatives correlated with public markets
  • Low-quality alternative managers
  • Alternatives without proper due diligence

⚠️ Common Pitfalls

✕Having opinions without execution criteria
✕Reviewing outcomes but not decisions
✕Abandoning rules during volatility spikes

📚 Case Studies

1
Dot-Com Bubble Peak (2000)
Swensen’s Yale endowment policy rebalanced away from soaring U.S. growth stocks into underweighted bonds, real assets, and diversifiers as tech valuations became extreme.
✨ Outcome：Reduced drawdowns in 2000–2002 bear market and preserved capital to buy equities at cheaper prices.
2
Global Financial Crisis (2008)
As equities and illiquid assets plunged, Swensen’s disciplined rebalancing shifted funds from Treasuries and bonds back into depressed equities and alternative assets despite market panic.
✨ Outcome：Positioned the endowment for strong post-2009 recovery, outperforming many peers that de-risked near the bottom.

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