Yale's David Swensen Recommends TIPS to Hedge Substantial Risk of Inflation

Yale's David Swensen, the best performing university portfolio manager over the last 20 years recommends TIPS as a way to hedge against potential inflation caused by the government's economic recovery spending.

Yales's David Swensen, the best performing university portofolio manager over the last 20 years recommends TIPS as a way to hedge against potential inflation caused by the government's economic recovery spending. 

In an interview with Consuelo Mack, shown below, he says that:

"We’ve had this massive fiscal stimulus, massive monetary stimulus, and it’s hard to see how that doesn’t translate into pretty substantial inflation, or at least pretty substantial risk of inflation."

Treasury-Inflation Protected Securities, known as TIPS, are a special secufrity offered by the United States Treasury in which the principal amount is adjusted for inflation.  TIPS pay a lower coupon than US Treasuries because the the principal is adjusted for inflation based on the Labor Department's CPI-U numbers.  As an example, if an investor were to buy a $1,000 TIPS bond and inflation were to rise at a 2% annual rate, the bonds would have an adjusted face value of $1,020 after one year.

Swensen's record at Yale has been impressive.  Under his leadership, Yale's endowment has increased 16.3% annually over the last 10 years versus an average of 6.5% for other university endowments.  Swensen boosted returns at Yale by investing in less conventional, less liquid markets.  He believed that investors are paid a premium for investing in less liquid markets and these markets offer better diversification than other more liquid and mature markets.

His record seems to validate this approach, for now.

He also believes that individual investors can maximize their returns by investing in index funds.  In the interview, Swensen told Mack that Swenson told Mack that equity-oriented investors should put 30 percent of their money to U.S. stocks, 15 percent to Treasury bonds and 15 percent to TIPS. He also recommended investments in REITs, emerging markets, and non-US developed nations.

His book Unconventional Success: A Fundamental Approach to Personal Investment lays out his philosophy in individual investing.

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

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