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Revenge of the (Harvard) nerds

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I catch a lot of flack for reading Harvard Business Review.

“Egghead academics with no real-world business experience telling you how to deal with a pain-in-the-a** employee? No thanks,” is how one colleague put it.

I showed him the return Harvard’s endowment generated in fiscal year 2008; it shut him up. Whatever they’re doing in their ivory towers isn’t all that complicated, and is a testament (yet again) to the benefits of asset allocation and a properly diversified portfolio. So relate this little tale the next time one of your clients gets emotional. Whether it’s an up or down market, money is still to be made. More importantly, this also means your poor performance is a whole lot tougher to excuse.

James Stewart, writing in his Common Sense column in the Wall Street Journal, runs through the numbers. The endowment generated a return of between 7 percent and 9 percent for fiscal year 2008.The S&P 500 fell about 15 percent during the same period – which equals a 22 point spread (if you didn’t get that, find another career).

“How did Harvard do it? The key is diversification, and not just by investing in a variety of stocks and bonds,” Stewart writes. “Harvard invests in 11 noncash asset classes, only one of which is U.S. stocks. Like Yale and other large endowments, it counts on one or more of those to shine even when others are weak, achieving better long-term results than could be attained with fewer asset classes. It looks as though Harvard’s 33 percent allocation to real assets, which include commodities and real estate, salvaged performance in what was otherwise a treacherous year.”

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