Is The Harvard Endowment Making A Huge Mistake?


Bloomberg has an article about Harvard Management Company's (HMC is the endowment) decision to increase its allocation to hedge funds. I was struck by the following;

To achieve his mandate of beating his peers, Narvekar appears to be making a contrarian move that could pay off if stocks head south.

I think there is a lot to learn from what endowments do but there is also a lot to learn about what not to do and beating his peers, keeping up with or actually exceeding the Joneses, is probably one of the worst things an investor can try to do and not just with investing, this matters on multiple levels.

"Multiple levels" includes other aspects of life including happiness and fulfillment. Over the weekend I followed @Awareintegrate on Twitter, I was drawn by an insightful Tweet but also this line in his profile; "If you don't know yourself, you don't know anything." Although not as eloquently as @Awareintegrate, I have addressed this same point numerous times. People who don't know themselves often spend money on the wrong things, and by spend I mean waste, creating a lifestyle that is more expensive and difficult to maintain (especially in the face of a shock) while at the same time creating a sort of opportunity cost in terms of money not saved for the future.

One of the benefits of living below your means is the extent to which you remove potential stressors from your life. Worrying less frequently should make life better by freeing you up emotionally to have more fun and enjoy things more. A different way I have seen this articulated, and I have parroted it, is that time equals wealth. The easiest way I know of to create this sort of wealth is to live below your means.

When you do this and you save more it is much easier to remain unemotional in the face of market volatility which makes you less likely to react emotionally by selling in the face of fear or taking too much risk in the face of greed. The portfolio implication is that there is no need to "beat you peer" or necessarily be concerned about beating your benchmark. It becomes easier to stick to the path you chose for yourself as being the best way to have the outcome you want.

If you're less worried about the day to day movements of the market you're in a position to just let the market work for you. In the last ten years, if you just bought an S&P 500 Index fund, you're up a little over 200%. That 200% has come with a few scary hiccups and people who over-reacted (were fearful) made it much harder for themselves to keep close to that 200%. 200% in a decade doesn't come that often. It is ok to lag it, but if you miss that sort of run you've dug a big hole for yourself.