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Invest Like Harvard and Yale

Contributed by mm | January 3, 2008 5:20 AM PST

6346-pie.jpgEver read about how those successful money managers at Harvard and Yale turn their respective endowments into double-digit gains year in year out? As a matter of fact, Harvard's endowment earned 15% per annum in the last 10 years, and Yale's boasted an annualized return of 17.2% during the same timeframe. Ever think about how your portfolio can match such a starring performance?

SmartMoney's recent article "A League of Their Own" shed some light on how these returns were achieved. Yes, by having tens of billions of dollars you can have asset to the best money management service out in the world, but these consistent performance boils down to one important decision: asset allocation.

We as individual investors are regularly taught that asset allocation is about finding the right risk/return balance by picking from asset classes like domestic equity, foreign equity, fixed income and cash, but those working at Harvard and Yale are maintaining a portfolio that is radically different:


As you can see, both universities only have less than 50% of their portfolio in those "traditional" asset classes. Instead, they invest heavily in real assets (commodities, real estate, etc.), private equity and absolute return investments (i.e. hedge funds and alike).

Why did they adopt such an unusual and sophisticated approach? According to SmartMoney's article:

As might be expected at big research universities, this aggressive move away from traditional assets was rooted in academic research suggesting that investors can earn a higher long-term rate of return with less risk by diversifying beyond the traditional mix of stocks and bonds. Economists James Tobin and Harry Markowitz each won a Nobel Prize for work they did on this topic while at Yale. Meyer, who ran Harvard's endowment for 15 years before leaving in 2005, and Yale's Swensen put those theories into practice.

The article went further to suggest that with the growing innovation in investment vehicles, retail investors have a shot to construct a similar portfolio using mutual funds and ETFs open to the general public. A model portfolio is given as follows:


This article is definitely the one that makes me think the most in the last several months. Am I confining myself too much in picking asset classes for my portfolio? While I don't see myself having a portfolio with more than half exposed to those "alternative" investments, it is probably in my best interest to add more flavors to my portfolio.

This Post Has Received 10 Comments. Share Your Opinions Too.

J.C.'s Money Commented on January 3, 2008

That is a very interesting article, thanks for the link.

Krimo Commented on January 4, 2008

You may also want to keep in mind that Harvard's endowment lost $350 million (subprime)

MM Commented on January 4, 2008


Investing is not about NOT losing every single dollar in principal. Otherwise one will only have limited choice to put the money on. The key of a portfolio, as the article suggests, is to find a good allocation of different asset classes that complement one another.

jack Commented on January 4, 2008

Yes, Yes. I also read that article. And it too made me think I should rethink, reevaluate my investments. Right now, I don't think I have the courage. Is it that simple? Hmmm!!! Probably, but I need a higher level of confidence while I wait for MMC to come back ... like MO. So!!! we shall see...

Flexo Commented on January 7, 2008

Thanks for pointing out this article. I am fascinated by the way the endowment programs invest...

Nick Commented on January 8, 2008

Excellent post. Stumbled on it. I'll definitely be linking to it sometime in the near future. Keep up the good work. I look forward to reading more from you now.

adfecto Commented on January 10, 2008

This is excellent information. In the future and my net worth grows, I will be looking for more ways to diversify my holdings outside of stocks and bonds. Thanks for posting.

nilesh Commented on January 14, 2008

It is a very good article. However what works for big boys does not necessarily work for the small guys like us. Big Boys generally have lots of insider info to make there informed decision. SmartMoney gave you the Model folio but did not give you matching back tested results for this folio. As an informed consumer of financial info one should not put any real money into this strategy until they paper trade it for year or two.

2million Commented on February 25, 2008

ohhh....good find. Very interesting. I wonder if other large endowments are following similar asset allocation including real estate and private equity.

KB Commented on September 6, 2008

Well bad advice... If one had followed your advice, they would have been down about 14% year to date.
S&P is down 15% YTD.


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