By John Grace
Contributing Columnist
Endowments, with their pioneering strategies, have long been a source of inspiration for the securities industry. Their innovative approaches can be a beacon of hope for individual investors, igniting a desire to enhance their understanding of investment strategies and inspiring them to explore new possibilities.
Endowments operate under vastly different conditions than individual investors. For example, while endowments’ investment horizons are often considered perpetual, individual investors can learn a few essential lessons from the endowments of major universities.
While the extensive list of 401(k) options may seem daunting, it’s important to remember that you have the power to choose. The myriad options, which can be grouped into stocks, bonds or cash, offer a level of flexibility that can cater to your unique investment goals.
And, if you’re still working at the same company, many 401(k) plans even allow for an in-service withdrawal, giving you even more control over your financial future and instilling a sense of confidence in your decisions.
An in-service withdrawal is simply a withdrawal from a qualified employer-sponsored retirement plan while an employee is still working. A 401(k) is a common example of such a plan, but it can also include plans like 403(b).
An in-service withdrawal may sometimes be possible, but meeting the right conditions to avoid penalties is essential. Generally, you must be at least 59½ or have a qualifying hardship that the IRS deems an immediate and heavy financial need. Other circumstances, like job loss, may permit an in-service withdrawal without penalties.
Once the funds are in an IRA Rollover, investors can move money from three asset classes to four or more areas for greater diversification. This diversification can lead to higher returns and lower volatility, providing a sense of optimism and reassurance about the potential of your investment strategy.
Interestingly, the $40.7 billion Yale Endowment 2023 reports less than one-10th of the portfolio in U.S. stocks, while foreign equity, private equity, absolute return strategies and real assets represent over nine-10ths of the endowment. To put it another way, unlike many retail investors, the Yale Endowment has less than 10% in U.S. equities (it has been around 3%) and 90% in areas where investors have little or no experience.
Yale drastically reduced the endowment’s dependence on U.S. equities over the past 30 years by reallocating assets to nontraditional asset classes. “In 1989, nearly three-quarters of the endowment was committed to U.S. stocks, bonds, and cash,” according to yale.edu. From the same source, we learn that “the heavy allocation to nontraditional asset classes stems from their return potential and diversifying power. Today’s actual and target portfolios have significantly higher expected returns and lower volatility than the 1985 portfolio.”
By their very nature, alternative assets tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management. The endowment’s long time horizon is well suited to exploiting illiquid, less efficient markets such as venture capital, leveraged buyouts, oil and gas, timber and real estate.
No one needs to be a rocket scientist to see that many investors often become very comfortable in their favorite asset class. Often the portfolio is in three asset classes, with the percentage of stocks or real estate being far north of 50%.
The endowments of major universities are often comprised of more than five asset classes, with no more than 20% allocated to any one type. In 2008, for example, when real estate, bonds and stocks got hammered, some exposure to nontraditional assets helped keep endowment and retail investors buoyant.
Now is the perfect time to implement your strategies so that you can tell your own survive and thrive story no matter what happens in D.C. or how the markets turn. Preparation trumps prediction.
John Grace is a registered representative with LPL Financial. His On the Money column runs monthly in The Wave. The opinions expressed here are for general information only and are not intended to provide specific advice or recommendations for any individual.
