“Great minds discuss ideas. Average minds discuss events. Small minds discuss people,” said Eleanor Roosevelt. When it comes to investing the conventional wisdom is to accept average returns. In fact, investors are told that there is no advantage to try doing better than average. When it comes to raising my two sons I expressed what I accepted to be true. If you are giving the job your best effort and you earn a grade of C, I am just fine with that. But do not believe that average is good enough. After all, average is only average. I don’t aspire to be average and neither should you. When undertaking a task some of us are determined to do all things possible to do better than average. Now that attitude makes it a game worth playing. We may not win the game, but we will play the game. As we review investors accounts we can see that no matter the number of mutual funds, investors on average held portfolios representing a two legged portfolio with 60% stocks and 40% bonds. Is that as good as it gets?
From 2001 to 2010 the average investors earned 1.5% per year 1. In sharp contrast, during the same time period we can see that endowments and foundations earned 5.1% a year 2. Although endowments and foundations (ie institutions) have longer time horizons and less liquidity needs they also have access to investments the average investors may not have, we see there is something we can learn from them.
Success Leaves Clues
If it is the case that great minds discuss things and success leaves clues, what can we learn from foundations and endowments? For one example let’s look at Yale Endowment’s holdings. According to Yale News on September 24, 2014, the endowment value grew from $20.8 billion on June 30, 2013, to $23.9 billion on June 30, 2014, net of spending. You and I aren’t private endowments so we may have more restrictions on our investment vehicles. We can, however, begin to learn from this article and see where we can include similar strategies in our own portfolios. Notice first that the average investor may have 100% of their assets primarily in a mix of 60% stocks and 40% bonds. The Dalbar study concludes the “average” investor is irrational and buys too late and sells to early. What does Yale Endowment do?
If we include cash, average investors may have as many as 3 asset classes. With greater diversification, the Yale Endowment holds 8 different asset classes. In fact, as of 6/30/14, you might be surprised to see that cash is 4%, fixed income is 5%, US/domestic stocks is 4%, and international equities is 11%. That total is 24% of the Yale Endowment, which comprises 100% of what most investors may hold. The difference of 76% is in other investment vehicles. Look for investment vehicles other than cash, bonds, and stocks.
Here is how the Yale University Investments Office explains their ideas. “Over the past 25 years, Yale dramatically reduced the Endowment's dependence on domestic marketable securities by reallocating assets to nontraditional asset classes. In 1990, over seven-tenths of the Endowment was committed to U.S. stocks, bonds, and cash. Today, domestic marketable securities account for approximately one-tenth of the portfolio, while foreign equity, private equity, absolute return strategies, and real assets represent nearly nine-tenths of the Endowment.
The heavy allocation to non-traditional asset classes stems from t heir return potential and diversifying power. Today's actual and target portfolios have significantly higher expected returns and lower volatility than the 1990 portfolio. Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active-management . The Endowment's long time horizon is well suited to exploiting illiquid, less efficient markets such as venture capital, leveraged buyouts, oil and gas, timber, and real estate.”
If you are on the cusp of retirement, you want to take this opportunity to see what you can learn from the best and the brightest. Perhaps you didn’t save enough. You may have missed out on starting to set money aside when you were younger. Maybe the Great Recession, the housing crunch or medical bills decimated your retirement account. No matter the cause, consider this a time to review your accounts to see if your on track to meet your goals. Do what Yale does. Take the time to discover how you too can diversify unlike you ever have before and identify active management strategies that may limit losses.
1Dalbar, Inc. “Quantitative Analysis of Investors Behavior (QAIB) 2011”
2Curian Institutional Process vs. Performance 10/2011Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Investors Advantage and NPC are separate and unrelated companies. The onions voiced in this article are for general information only, they are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investment may be appropriate for you, consult with your financial, tax or legal professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and risk tolerance. Charts are shown for illustrative purposes only. Past performance is not indicative of future returns. Diversification does not guarantee investment returns and does not eliminate risk of loss. Indices are unmanaged measures of market conditions. It is not possible to invest directly into an index.