Should You Invest Like Harvard

Should You Invest Like Harvard?

Many people think the smarter you are and the more sophistication you bring to your portfolio, your performance will be better.  This is a big reason that hedge funds continue to attract assets.  Well, what if we had a chance to look at the smartest people in the world, with nearly unlimited resources, to see if that theory holds water?  That’s exactly what we’ve done when looking at the Harvard Endowment Fund.  The $39 billion funds publish their results each year, and we can compare how they’ve done with a fairly simple global market portfolio.  The results are pretty shocking:

Year Harvard Endowment Global Equity Portfolio*
2009 -27.3% -26.7%
2010 11.0% 24.7%
2011 21.4% 33.6%
2012 -0.1% -3.7%
2013 11.3% 21.4%
2014 15.4% 24.7%
2015 5.8% 1.7%
2016 -2.0% -1.6%
2017 8.1% 21.6%
2018 10.0% 10.8%
10 Year Return 4.5% 9.1%

As you can see, a simple market portfolio has doubled the return of Harvard’s endowment over the last 10 years!  One explanation could be that Harvard is more focused on managing volatility and therefore doesn’t risk it.  But looking at the financial crisis in 2009 (their fiscal year is 6/30), that thesis didn’t hold up.  Here is what we can learn from this:

  • Simple almost always trumps complex– hedge funds, natural resource funds, private equity…they all sound very fancy and potentially what you should be doing if you have lots of money. Still, in many cases, those funds fail to outperform simple indexes.
  • Fees matter– while Harvard does not publish their fees paid to managers, hedge funds, private equity, and other exotic investments almost always carry larger fees than index funds. Those fees act as a drag on performance.
  • Being “smarter” may not produce better results– the market is a gigantic meeting place for brilliant people to set prices. The reason Harvard has underperformed is not that they aren’t smart (they’re brilliant people); it’s because the other people they are competing with are also brilliant.  Since buying and selling investments is a zero-sum game (there will be a winner and loser with every trade), it is hard to outperform because it is difficult to get an advantage over other very intelligent investors.  We have yet to find evidence that smart people can consistently beat the market.
  • Focus on what you can control– keep costs low, control taxes, diversify, and bring discipline to your investment process. It’s not sexy, but focusing on these four things will put you ahead of the vast majority of investors…maybe even Harvard!

*Global Equity Portfolio is represented by the DFA Equity Balanced Index

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.

Recent Insights

Those That Don’t Know Their History Are Doomed to Repeat It: Beware of the S&P 500 Index

For the last 10 years the S&P 500 has generated an average annual return of 15.35% and has only had one negative year (2018). In addition, these mutual funds have expense ratios hovering around zero. What’s not to love?

A Year to the Day- What a Ride!

The market last year tested our patience and our resolve. Those who buckled up and stayed on board, however, were richly rewarded.

IRS Extends 2020 Tax Filing Deadline to May 17th

On March 17th, the IRS announced they would be extending the 2020 tax filing deadline for individuals from April 15th to May 17th to accommodate the ongoing challenges presented by the COVID-19 pandemic.