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Blindly shoving all your money into Vanguard ETFs is a strategy that works well for almost every individual who's retirement period maxes out at 70 years (for t

by zrail 11y ago

Blindly shoving all your money into Vanguard ETFs is a strategy that works well for almost every individual who's retirement period maxes out at 70 years (for the MMM types). An endowment is a fund of money designed to sustain operations of it's benefactor forever. Not 10 years. Not 50 years. Literally forever. When you're operating on an indefinite timescale your idea of "risk" changes considerably. Take a look at the Harvard Endowment report[1], specifically the table on page 2. They are incredibly well diversified, across domestic and international public equities, as well as private equity, commodities, fixed income securities (bonds, etc), real estate, and a category they call "absolute return", which is where they've placed money into external hedge funds. If the US economy tanks, they'll be fine. If Europe falls apart, they'll be fine. A bunch of start up unicorns fail in Silicon Valley? Fine. My point is that the article completely misses the goals of an endowment. They don't particularly care about matching or beating an index, nor do they care about risk (as measured by volatility). They care about wipe out risk, on the scale of centuries. [1]: http://www.hmc.harvard.edu/docs/Final_Annual_Report_2014.pdf http://www.hmc.harvard.edu/docs/Final_Annual_Report_2014.pdf

tamana 11y ago
Now explain how your theory fits that facts that 1) Harvard's endowment gets massive donations every year 2) Harvard has an incredibly high rate of return on invested capital, not low-risk low-reward
- zrail 11y ago
  I don't see how these facts are relevant to my statements. Every endowment gets massive donations. Harvard hires very smart people to run their money and they are not beholden to anyone other than themselves for the choices they make, which gives them lots of flexibility.
enoch_r 11y ago
> They are incredibly well diversified, across domestic and international public equities, as well as private equity, commodities, fixed income securities (bonds, etc), real estate, and a category they call "absolute return", which is where they've placed money into external hedge funds. If the US economy tanks, they'll be fine. If Europe falls apart, they'll be fine. A bunch of start up unicorns fail in Silicon Valley? Fine. This does not appear to be true. See page 14 of this paper, which shows the 2008-2009 performance of six privately endowed colleges and universities in New England. The smallest loss was 18%, the largest was 30%. Between January 1, 2008, when the S&P500 was at 1,378.76, and January 1, 2009, when the S&P500 was at 868.58, the S&P500 lost 37%. A reasonable mix of stocks and bonds would have had a similar loss as the endowments. http://www.tellus.org/pub/Tellusendowmentcrisis.pdf http://www.tellus.org/pub/Tellusendowmentcrisis.pdf
- wdewind 11y ago
  Right, in 2008 when the entire economy tanked they also tanked. You can't really out-diversify the entire economy tanking. What happened in the years after that? Oh right that paper has no idea because it was last updated in 2010.
  - shoover 11y ago
    You can't really out-diversify the entire economy tanking. Sometimes you can. Chart [1] shows the ratio of a particular diversified portfolio's value (4x25 Permanent Portfolio) to the three fund portfolio's value starting in 2005. The ratio increases sharply in 2008-2009 and retains its edge through the subsequent stock bull market. [1] http://morning-wave-7809.herokuapp.com/#iau,vti,shy,tlt/vtsmx*4,vgtsx*2,vbmfx*4 http://morning-wave-7809.herokuapp.com/#iau,vti,shy,tlt/vtsm...
    - wdewind 11y ago
      The major point of OPs statement is that while sometimes you can get lucky for a short period of time (which is what you just cherrypicked), for an endowment you can't really do stuff like that because you are so big and have such a long term perspective. Regardless, I'm not seeing the narrative you describe in your graph.
      - shoover 11y ago
        I agree with the OP's point, but you mentioned 2008 and what happens after that and I'm saying you can diversify in a way that handles those kinds of economic events. (The strategy I mentioned also got really lucky in the 70s and held up cumulatively since then. Of course you can make it unlucky by picking different dates, too e.g. ignore the 70s or 2001 or 2008.) The chart page doesn't explain things very well, so it takes a bit to unpack, but the point of the chart is actually to give a better idea of comparative performance over a time period rather than focusing on a particular number like average return. Basically it's dividing the current value of one portfolio by the other at each point. The ratio shows the ebb and flow of the two portfolios against each other. John Bogle's speech [1] and this forum [2] probably explain it better. [1] http://www.vanguard.com/bogle_site/sp20020626.html http://www.vanguard.com/bogle_site/sp20020626.html [2] https://www.bogleheads.org/forum/viewtopic.php?t=138973 https://www.bogleheads.org/forum/viewtopic.php?t=138973 EDIT: cleaned up the first paragraph.
rbcgerard 11y ago
I wonder how much of the difference between the "bogle" portfolio and the endowment portfolios can be explained by simply adding Real Asset beta and Alternative beta?
- gburt 11y ago
  What does this mean (in laymen terms)?
mathattack 11y ago
Endowments also worry about mapping their endowment to potential future costs or liabilities: 1) When the economy is bad, they need to provide more financial aid, so they want some counter-cyclical assets. (Long term bonds who increase in value when rates decline are an example.) 2) If they want to expand in the future, they don't want to be priced out of their neighborhood, so they're more likely to invest in local real estate. This doesn't mean that endowments are all optimally managed - many would still be better served with ETFs. It's just not as simple as tossing everything into the S&P500.
justin66 11y ago
>If the US economy tanks, they'll be fine. If Europe falls apart, they'll be fine. A bunch of start up unicorns fail in Silicon Valley? Fine. I think you're probably unfamiliar with the Harvard endowment's performance over time. They were badly hosed during the recession, despite their diversification. > They care about wipe out risk, on the scale of centuries. Perhaps they should, but they don't. They could easily put all their money in TIPS, after all. The various college endowments are quite competitive with one another, with all the risk taking that implies. It's very silly.

by zrail 11y ago

tamana 11y ago

Now explain how your theory fits that facts that 1) Harvard's endowment gets massive donations every year 2) Harvard has an incredibly high rate of return on invested capital, not low-risk low-reward

zrail 11y ago
I don't see how these facts are relevant to my statements. Every endowment gets massive donations. Harvard hires very smart people to run their money and they are not beholden to anyone other than themselves for the choices they make, which gives them lots of flexibility.

enoch_r 11y ago

> They are incredibly well diversified, across domestic and international public equities, as well as private equity, commodities, fixed income securities (bonds, etc), real estate, and a category they call "absolute return", which is where they've placed money into external hedge funds. If the US economy tanks, they'll be fine. If Europe falls apart, they'll be fine. A bunch of start up unicorns fail in Silicon Valley? Fine. This does not appear to be true. See page 14 of this paper, which shows the 2008-2009 performance of six privately endowed colleges and universities in New England. The smallest loss was 18%, the largest was 30%. Between January 1, 2008, when the S&P500 was at 1,378.76, and January 1, 2009, when the S&P500 was at 868.58, the S&P500 lost 37%. A reasonable mix of stocks and bonds would have had a similar loss as the endowments. http://www.tellus.org/pub/Tellusendowmentcrisis.pdf http://www.tellus.org/pub/Tellusendowmentcrisis.pdf

wdewind 11y ago
Right, in 2008 when the entire economy tanked they also tanked. You can't really out-diversify the entire economy tanking. What happened in the years after that? Oh right that paper has no idea because it was last updated in 2010.
- shoover 11y ago
  You can't really out-diversify the entire economy tanking. Sometimes you can. Chart [1] shows the ratio of a particular diversified portfolio's value (4x25 Permanent Portfolio) to the three fund portfolio's value starting in 2005. The ratio increases sharply in 2008-2009 and retains its edge through the subsequent stock bull market. [1] http://morning-wave-7809.herokuapp.com/#iau,vti,shy,tlt/vtsmx*4,vgtsx*2,vbmfx*4 http://morning-wave-7809.herokuapp.com/#iau,vti,shy,tlt/vtsm...
  - wdewind 11y ago
    The major point of OPs statement is that while sometimes you can get lucky for a short period of time (which is what you just cherrypicked), for an endowment you can't really do stuff like that because you are so big and have such a long term perspective. Regardless, I'm not seeing the narrative you describe in your graph.
    - shoover 11y ago
      I agree with the OP's point, but you mentioned 2008 and what happens after that and I'm saying you can diversify in a way that handles those kinds of economic events. (The strategy I mentioned also got really lucky in the 70s and held up cumulatively since then. Of course you can make it unlucky by picking different dates, too e.g. ignore the 70s or 2001 or 2008.) The chart page doesn't explain things very well, so it takes a bit to unpack, but the point of the chart is actually to give a better idea of comparative performance over a time period rather than focusing on a particular number like average return. Basically it's dividing the current value of one portfolio by the other at each point. The ratio shows the ebb and flow of the two portfolios against each other. John Bogle's speech [1] and this forum [2] probably explain it better. [1] http://www.vanguard.com/bogle_site/sp20020626.html http://www.vanguard.com/bogle_site/sp20020626.html [2] https://www.bogleheads.org/forum/viewtopic.php?t=138973 https://www.bogleheads.org/forum/viewtopic.php?t=138973 EDIT: cleaned up the first paragraph.

rbcgerard 11y ago

I wonder how much of the difference between the "bogle" portfolio and the endowment portfolios can be explained by simply adding Real Asset beta and Alternative beta?

gburt 11y ago
What does this mean (in laymen terms)?

mathattack 11y ago

Endowments also worry about mapping their endowment to potential future costs or liabilities: 1) When the economy is bad, they need to provide more financial aid, so they want some counter-cyclical assets. (Long term bonds who increase in value when rates decline are an example.) 2) If they want to expand in the future, they don't want to be priced out of their neighborhood, so they're more likely to invest in local real estate. This doesn't mean that endowments are all optimally managed - many would still be better served with ETFs. It's just not as simple as tossing everything into the S&P500.

justin66 11y ago

>If the US economy tanks, they'll be fine. If Europe falls apart, they'll be fine. A bunch of start up unicorns fail in Silicon Valley? Fine. I think you're probably unfamiliar with the Harvard endowment's performance over time. They were badly hosed during the recession, despite their diversification. > They care about wipe out risk, on the scale of centuries. Perhaps they should, but they don't. They could easily put all their money in TIPS, after all. The various college endowments are quite competitive with one another, with all the risk taking that implies. It's very silly.