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Why Not Just Be Average


Have you ever heard of the Lake Wobegon effect?  It is pulled from the old Garrison Keillor radio show, at least that is how I first heard of Lake Wobegon.  He used to comment that in this town – “all the women are strong, all the men are good-looking, and all the children are above average.”  The effect is a psychology term referring to the ability to overestimate one’s abilities, better know as self-enhancement bias.

Some quick examples of this concept are below:

  • 90% of men believe they are above average looking.
  • 25% of people believe they are in the top 1% in their ability to get along with others.
  • 93% of drivers feel they are better than average.
  • 94% of university professors feel they do above average work.

I was reminded of this effect when I came across an article recently.  It had to do with the 10-year returns of Ivy league endowment funds.  For years we have seen articles talking about how great most of these endowments manage their money.  Again, maybe only nerds like me have seen them.  There are even numerous books on how to manage money like they do.  Well, the topic of the article was to compare their performance versus a simple 60/40 portfolio.  Just to clarify, a 60/40 portfolio is made up of 60% in US stocks and 40% in bonds (unfortunately, the article did not get deeper as to the specific holdings). 

The endowments represented what I guess is the normal Ivy league of Harvard, Yale, Dartmouth, Brown, Cornell, Princeton, Penn, and Columbia.  All of these endowments like to invest in a lot of areas not available to the “normal” investor, such as private equity, unique real estate holdings and venture capital positions.  Definitely more complex than a simple 60/40 portfolio of a few holdings.  One of the surprising findings was these Ivy league portfolios had much more investment risk even though they had more holdings.Just a reminder holding more positions does not automatically mean reduction of risk.

Alright, you really came here to find out how their performance matched up, so let’s get to it.The 60/40 portfolio’s average annual return from July 1, 2008 through June 30, 2018 was 8.1%.  Not shabby at all.  Princeton and Columbia came in just behind with averages of 8%.  They were the best performing of the Ivies.  Penn, Yale and Dartmouth all fell in the 7% range with averages of 7.7%, 7.4% and 7.3% respectively.  Brown clocked in at 5.9%, Cornell scored a 4.8% and Harvard brought up the rear at a measly 4.5%. 

Now, in defense of the Ivies, if you lengthen the measurement periods to 15 and 20 years they did outperform the plain old 60/40 portfolio, although there is only data for 4 schools for the 20 year period.  Also, 2018 was a good year for all the schools, except one, as the other 7 outperformed the 60/40 portfolio.  Columbia was the one laggard (I knew you wanted to know).

My takeaways from this article.  First, very few individual investors have access to the resources of private equity and venture capital.  So, trying to replicate an identical Ivy strategy is nearly impossible. I don’t even want to imagine what the costs would be versus buying a 60/40 index.Next, their investment timelines are different than the average investor too.  You might want to retire at some point while endowments are investing for an infinite period.  Basically, your goals are different.  Finally, being average is okay.  If you were average for the last 10 years you would have outperformed every single one of the “greatest investment minds” out there in the Ivy league endowment world, who all apparently grew up in Lake Wobegon😉