4 ms·

There is no risk free 5% yearly return. The current interest rates may be temporary and there is inflation that erodes the 50M and the Principal amount.

mgiampapa 3y ago
On a large scale a 5% average return is very conservative. No interest rates won't stay where they are, but no one would invest an endowment just by putting it a HYSA.
- JumpCrisscross 3y ago
  > On a large scale a 5% average return is very conservative Any return above GDP growth is not conservative. On average, real world GDP has grown at 3 to 5% per year since 1964 [1]. (We use real GDP because university costs will increase with inflation.) 600 students would have paid $35.4mm in tuition a year at $59,000 per year. That's a 3.54% drawdown per annum, right in line with real GDP growth. A 4 to 5% real return target is doable, but not conservative and certainly not a figure with a lot of margin for error. [1] https://www.macrotrends.net/countries/WLD/world/gdp-growth-rate https://www.macrotrends.net/countries/WLD/world/gdp-growth-r...
  - Emma_Goldman 3y ago
    Growth is a useless indicator. The whole point of Piketty's argument is that the return on capital tendentially outstrips the rate of growth, and that large investors have access to especially high return assets. The OP is right that a 5% average annual return is conservative.
    - JumpCrisscross 3y ago
      > Growth is a useless indicator. The whole point of Piketty's argument is that the return on capital tendentially outstrips the rate of growth I'll sidestep that Piketty measures wealth and calls it capital. Because that observation says nothing about how risk is distributed across those returns. > large investors have access to especially high return assets $1bn doesn't make for a "large investor" in institutional terms. > OP is right that a 5% average annual return is conservative No, they are not. There are objective measures for this. I've worked closely with endowments the world over. A manager pitching a 5% target return on a fund with a 3.5% annual drawdown as conservative would be fired. A banker pitching the same would be subject to professional sanctions.
      - Emma_Goldman 3y ago
        > Cute Sorry, this is childish and you don't substantively respond to the core point. I am not going to waste my time.
        JumpCrisscross 3y ago
        Fair enough. Edited. > you don't substantively respond to the core point Yes, I do. Even if capital returns well in excess of growth on average, that doesn't change that the returns on assets in that excess regime are riskier than those below it. (This actually being formally provable by way of seniority.) Excess returns are never achived conservatively, let alone very conservatively. Piketty's work has been seriously challenged. It makes good points. But it also contains bad ones, including a couple really sloppy and unsubstantiated assertions. His conflation of wealth and capital being germane to your argument.
  - scotty79 3y ago
    > Any return above GDP growth is not conservative. That would be true if additional GDP was distributed equally. But the rich capture majority of it in their investment vessels. So for a person with capital I think double of GDP is still conservative as long as inequality grows.
  - VincentEvans 3y ago
    “As of October 2023, Harvard's endowment has an 8.2% 10-year return. In fiscal year 2023, endowment returns averaged 7.7%, with smaller endowments posting larger returns. Institutions with over $5 billion in assets have historically had higher 10-year average returns of 9.1%.” https://www.highereddive.com/news/college-endowment-returns-fiscal-2023/707575/ https://www.highereddive.com/news/college-endowment-returns-...
    - HDThoreaun 3y ago
      10 years isnt very long. Whos to say we'll have another 40 year bull market like we just did?
      - VincentEvans 3y ago
        Trailing 10 year performance is a standard reporting metric used to facilitate risk-and-return decisions in an uncertain world. Here it serves to simply add weight to an argument that expecting a 5% annual return for invested endowment funds is reasonable and supported by historical evidence. If things do not go as well going forward - all it means that principal will erode over time.
VincentEvans 3y ago
I didn’t say risk-free, I said “conservative”. But let’s turn to examples: “As of October 2023, Harvard's endowment has an 8.2% 10-year return. In fiscal year 2023, endowment returns averaged 7.7%, with smaller endowments posting larger returns. Institutions with over $5 billion in assets have historically had higher 10-year average returns of 9.1%.” https://www.highereddive.com/news/college-endowment-returns-fiscal-2023/707575/ https://www.highereddive.com/news/college-endowment-returns-...

mgiampapa 3y ago

On a large scale a 5% average return is very conservative. No interest rates won't stay where they are, but no one would invest an endowment just by putting it a HYSA.

JumpCrisscross 3y ago
> On a large scale a 5% average return is very conservative Any return above GDP growth is not conservative. On average, real world GDP has grown at 3 to 5% per year since 1964 [1]. (We use real GDP because university costs will increase with inflation.) 600 students would have paid $35.4mm in tuition a year at $59,000 per year. That's a 3.54% drawdown per annum, right in line with real GDP growth. A 4 to 5% real return target is doable, but not conservative and certainly not a figure with a lot of margin for error. [1] https://www.macrotrends.net/countries/WLD/world/gdp-growth-rate https://www.macrotrends.net/countries/WLD/world/gdp-growth-r...
- Emma_Goldman 3y ago
  Growth is a useless indicator. The whole point of Piketty's argument is that the return on capital tendentially outstrips the rate of growth, and that large investors have access to especially high return assets. The OP is right that a 5% average annual return is conservative.
  - JumpCrisscross 3y ago
    > Growth is a useless indicator. The whole point of Piketty's argument is that the return on capital tendentially outstrips the rate of growth I'll sidestep that Piketty measures wealth and calls it capital. Because that observation says nothing about how risk is distributed across those returns. > large investors have access to especially high return assets $1bn doesn't make for a "large investor" in institutional terms. > OP is right that a 5% average annual return is conservative No, they are not. There are objective measures for this. I've worked closely with endowments the world over. A manager pitching a 5% target return on a fund with a 3.5% annual drawdown as conservative would be fired. A banker pitching the same would be subject to professional sanctions.
    - Emma_Goldman 3y ago
      > Cute Sorry, this is childish and you don't substantively respond to the core point. I am not going to waste my time.
      - JumpCrisscross 3y ago
        Fair enough. Edited. > you don't substantively respond to the core point Yes, I do. Even if capital returns well in excess of growth on average, that doesn't change that the returns on assets in that excess regime are riskier than those below it. (This actually being formally provable by way of seniority.) Excess returns are never achived conservatively, let alone very conservatively. Piketty's work has been seriously challenged. It makes good points. But it also contains bad ones, including a couple really sloppy and unsubstantiated assertions. His conflation of wealth and capital being germane to your argument.
- scotty79 3y ago
  > Any return above GDP growth is not conservative. That would be true if additional GDP was distributed equally. But the rich capture majority of it in their investment vessels. So for a person with capital I think double of GDP is still conservative as long as inequality grows.
- VincentEvans 3y ago
  “As of October 2023, Harvard's endowment has an 8.2% 10-year return. In fiscal year 2023, endowment returns averaged 7.7%, with smaller endowments posting larger returns. Institutions with over $5 billion in assets have historically had higher 10-year average returns of 9.1%.” https://www.highereddive.com/news/college-endowment-returns-fiscal-2023/707575/ https://www.highereddive.com/news/college-endowment-returns-...
  - HDThoreaun 3y ago
    10 years isnt very long. Whos to say we'll have another 40 year bull market like we just did?
    - VincentEvans 3y ago
      Trailing 10 year performance is a standard reporting metric used to facilitate risk-and-return decisions in an uncertain world. Here it serves to simply add weight to an argument that expecting a 5% annual return for invested endowment funds is reasonable and supported by historical evidence. If things do not go as well going forward - all it means that principal will erode over time.

VincentEvans 3y ago

I didn’t say risk-free, I said “conservative”. But let’s turn to examples: “As of October 2023, Harvard's endowment has an 8.2% 10-year return. In fiscal year 2023, endowment returns averaged 7.7%, with smaller endowments posting larger returns. Institutions with over $5 billion in assets have historically had higher 10-year average returns of 9.1%.” https://www.highereddive.com/news/college-endowment-returns-fiscal-2023/707575/ https://www.highereddive.com/news/college-endowment-returns-...