You know who’s got a lot of money?
And no, I’m not talking about Elon Musk. (According to Bloomberg, even after losing $200 billion since 2021, he’s still worth $137 billion.)
I’m talking about colleges.
In the U.S. alone, colleges are sitting on more than half a trillion dollars.
Furthermore, while most investors got killed last year as the market crumbled, some universities didn’t lose a dime. And that’s after they were up fifty percent in 2021.
So today, I’ll reveal their investment secret — and explain how you can start using it in 2023.
Endowments Are Big Business
An endowment is a pool of money a university controls that helps support its mission. Much of this money comes from donations from alumni.
Schools use a small amount of their endowment every year (generally about five percent) for things like scholarships, salaries for professors, and upgrades to school facilities.
The rest of the money, they invest.
And since we’re talking about hundreds of billions of dollars — Harvard alone is sitting on $50 billion — the people in charge of investing it are some of the best and brightest.
So, how exactly do the best and brightest invest?
The Endowment Investment Model
When ordinary folks invest, most of them stick with stocks and bonds.
For example, many Main Street investors have a portfolio of 60% stocks, 40% bonds.
A 60/40 portfolio is meant to provide growth as well as stability. So even if your stocks are crashing, your bonds should hypothetically keep you above water.
More recently, ordinary investors have started adding international stocks. So now their portfolios are 70% stocks (50% U.S., 20% international), 30% bonds and cash.
But universities invest differently. Specifically:
- They invest in many other asset classes besides stocks and bonds.
- They allocate far more of their capital to “illiquid” assets — in other words, assets that can’t necessarily be turned into cash at the drop of a hat.
- They allocate far less of their capital to assets that have low expected returns, like cash.
Here’s a chart, courtesy of GritALTS, that shows the difference between the portfolios of Main Street investors (on the left) and University Endowments (on the right).
Such assets include real estate, venture capital, and private equity.
This investment strategy has been around for decades. It was originally developed by the Chief Investment Officer of Yale University in the 1980s, and was gradually copied by other universities as well as legendary investors like Ray Dalio from Bridgewater Associates, the world’s largest hedge fund.
The Proof Is in the Pudding
How has this model performed?
Well. In fact, very well.
In 2021, universities using this model (including Dartmouth, Bowdoin, and Princeton) delivered returns of approximately 50%. That’s nearly triple the Dow’s 18.7% return.
And in 2022, when most investors got demolished by 20% or more, Cornell was only down by about 2%, and University of Pennsylvania didn’t lose a dime.
That’s what can happen when you have a greater allocation to “alternative” investments.
The Critics Say…
So, should you aim to use the Endowment model too?
Some critics say no.
They argue that the success of the model is largely due to the resources and expertise of the portfolio managers — the “best and brightest” investors I mentioned earlier.
Furthermore, they say it’s too complex and costly for individual investors to get access to such investments.
But here’s what we say:
The critics should be ashamed of themselves!
Dip Your Toe in the Water
The data is clear:
As you just learned, diversifying into alternative assets provides clear financial benefits in good times and bad.
And through Crowdability, not only can you learn how to get access to the “best and brightest” alternative portfolio managers…
But you can get started with minimum investments of $1,000, $100, or sometimes just $10.
So as you’re putting together your investment game plan for 2023, be sure to include alternative assets…
And be sure to keep reading these pages!