Investing Ivy League-Style – Is It Right for You?

Suppose you want to pick a stock to invest in; how would you go about making your choice? Check out the Wall Street Journal or Barron’s, or find out what Warren Buffett buys? Ask a friend for the name of his broker?

For years, novice investors sought out the simplistic advice of experts like Peter Lynch, erstwhile head of the Fidelity Magellan Fund, who offered nuggets of wisdom like “Never invest in any idea you can’t illustrate with a crayon,” and “Never bet on a comeback when they’re playing ‘Taps’.”

But once the financial crisis of 2007-09 shredded individual investors’ conventional portfolios of stocks and bonds, many became desperate for what they hoped would be a better way.  Individuals started following the lead of institutional investors like university endowment funds, or even investment banks and hedge funds, putting their savings in what’s known as “alt-funds” for the alternative assets they invest in.

The thinking is, “If big institutions like Harvard or Yale invest in these products, how can I go wrong?”  But financial advisors such as Jeff Walker, director of qualitative research for RIA Global Financial Private Capital, think it’s unwise for us to mimic the trading habits of big institutions.   “We don’t think it’s appropriate for individuals to be investing in [leveraged] funds or obscure asset classes.”

Take Harvard.  Founded in 1636, the university’s been around for almost four hundred years, with no end in sight, and has an endowment fund greater than $36 billion (yes, that’s billions).  What’s appropriate for an institution with more assets than some countries, and an investing timeframe of centuries isn’t really comparable to you or me, who, whether we plan to or not, are likely to exit the workforce in a decade or two and will then need income to eat and see the doctor.

That’s why Walker stresses that investors should have goals that work for their budgets, retirement, and future income needs. Successful investing has nothing to do with the sophistication or trendiness of a particular investment product.

In fact, it’s often the reverse, which may be why alt-funds haven’t worked out well for retail investors. According to Jason Kephart, a fund analyst at Morningstar, “The low-return environment and the relatively high fees of alt funds [are] a tough combination…. Performance hasn’t lived up to what people expected.”

That’s not the only problem.  In an August 1 Portfolio Perspective on CNBC, panel members discussed the liquidity problem inherent in certain real estate funds.  The issue?  While investors buy into the funds thinking they can easily get in and out of them, managers are investing shareholders’ monies in assets that can’t be cashed out for months, at least.  For retail investors, especially those of us over fifty, a lack of clarity over which of your assets can be liquidated quickly could be disastrous in the event of a crisis.

Institutional investing is great for immovable behemoths like Harvard that have expert upon expert and doubtless short, mid, long and super-long-term game plans.  You don’t have that luxury, and you don’t have a margin of error of billions.  You need to know precisely what you have, and how much is in liquid hard assets you can access in the event of an emergency.  It’s not enough to have a plan; you have to have one that will fit your needs realistically.