When it comes to intellectual prestige, no American institute of higher learning can match Harvard University. Its reputation has helped the school to amass an endowment of more than $37 billion.
For some comparison, thirty-nine of the fifty states have less than that in their annual budget.
According to money manager and Bloomberg columnist Barry Ritholz, the joke is that Harvard is a $37 billion hedge fund with a small college attached to it.
However, if it really were a hedge fund, it’s one that you would not have wanted to be invested in. Over the past decade it has significantly underperformed when compared to the overall market.
Smart People Also Make Mistakes
According to the Boston Globe, over the past year, while many other university endowments saw returns on their investments in the double-digits, Harvard’s languished with a gain of only 8.1%. During that same period, the S&P 500 gained 18%.
But this lack of performance is not because of a lack of effort on the part of the school’s investment team. One of the most elite groups in finance, they have steered Harvard on an innovative course that has included putting money into hedge funds, real estate, and natural resources such as timberland and wineries.
Ritholz writes, “If there ever was an argument for endowments to turn to passive indexing, Harvard is it.”
He argues that just because someone is running a multi-billion dollar endowment associated with some of the most sophisticated investors, there’s no reason to think that they’re not going to succumb to the same cognitive errors and psychological failings that every other human being does.
Of course, this isn’t just Harvard’s problem. We all struggle with cognitive and emotional challenges when it comes to money and investing. That’s why working with an independent advisor can help you gain clarity and objectivity about your personal financial goals.
When Stephen Dubner, author of Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, found out that all the top-performing Ivy League endowments had a return of around 8% over the past decade, he wondered how his own education fund would compare.
“Just out of curiosity,” he says, “I went and looked at my boring, own kids’ college savings fund, which is stashed in a very dull and pretty cheap 529 plan.”
He was surprised to find that his 10 year return beat every single Ivy League endowment. Not only were the schools underperforming in relation to the market, but they were paying millions in fees for the privilege of being actively managed.
As Ritholz says, it’s a case of some very smart people buying into the Lake Wobegon syndrome: everybody wants to believe they’re above average. They say to themselves, “Sure it’s hard to beat the market, but I can.”
The Advantage of a Systematic Plan
Of course, a college endowment and an individual retirement account are different in many significant ways. But both have the goal of maximizing returns while protecting the capital invested. And based on many decades of data, it appears that both can benefit from a broadly diverse exposure to the market while avoiding the unnecessary risks and fees that come with active management.
Fortunately, you don’t need to repeat Harvard’s mistakes.
Your trusted advisor can help you formulate and stick to the long-term plan that will give you the best chance of reaching your investing and retirement goals.