We all can get a lesson on the value of diversification by looking at the portfolio of Harvard Management Co., the entity that operates the Harvard endowment fund.
For the fiscal year ending June 30, 2008, the fund had an 8.6% return on investments. That compares to the Standard & Poor’s 500 index (of large U.S. stocks) that declined 13.1 percent during the fiscal year and the Lehman Aggregate Index (a broad proxy for the bond market) that gained 7.1 percent during that period.
How does Harvard Management Co. do it? Diversification.
Harvard only has 12% of its funds in U.S. equities and only 9% in fixed income. Compare that 21% combination of U.S. equities and fixed income with your portfolio.
Harvard uses a broad list of asset classes. 12% of the funds are in developed foreign equities. 10% are in emerging market equities. That gets us up to a total of 43% in traditional equities and fixed income.
Harvard invests a substantial portion of the portfolio, 33%, in commodities, including timber lands that Harvard directly owns. Another 11% of the portfolio is invested in private equity and 18% in hedge funds.
What this shows us is that portfolio diversification not only reduces volatility but also contributes to return on investment. We can all get an education in finance from Harvard.
Related Activities and Side Trips
- Create an Asset Mix Using Diversification and Your Target Portfolio
- Equities in a Taxable Account
- Index Funds – All In or All Out
- Index Funds and the Efficient Market Hypothesis
- Index Funds, Tax-Managed Funds and ETFs – Low-Cost, Diversified
- Use an ETF to Build Net Worth
- Withdrawal Rates in Retirement – Longevity and Planning
- Your Financial Portfolio In Retirement – Asset Allocation
