Diversity for the Modern Portfolio


If you have been living above ground in the United States for the past three years, chances are good that you’ve heard the buzz phrases “lost decade” and “new normal” to describe the economy and the stock market.  This month, the S&P 500 fell to around 1,100, the same number it was in late 2009, and sadly, 2008, 2003, 2001, and 1998.  This summer has been a microcosm of the last 15 years of a stock market characterized by volatility and a total lack of progress.  Most recently, the market has been paralyzed by fears surrounding European and American debt, and the very real possibility of another worldwide recession.  How has this affected the average investor?


Anyone maintaining a traditional 60/40 stock and bond portfolio during this period has made virtually no money (especially when adjusted for inflation – remember $1 gas?), and has seen more than a third of their wealth vanish twice.  That’s assuming your managers were good enough to keep up with major market indexes after fees, of which 75% are not.  The traditional model for individual investors is losing its luster.


Enough doom and gloom.  Lots of people can tell you how bad things have been, but it seems only a handful of people are aware of how to deal with it.  Nobel Prize winner Professor Harry Markowitz is one of them.  His Modern Portfolio Theory describes the rationale for diversification, not just across different sectors of the stock and bond markets, but across a broad array of asset classes with varying correlations to one another.  Two well-known adherents to Markowitzs’ teachings are the endowment funds of Harvard and Yale Universities.  As you can see from the table below, these endowments haven’t had pure stock/bond allocations since the 1980s.  This model of diversity has allowed these University Endowments to beat the S&P 500 by over 10% per year during the 10-year period ending June 30, 2009.



For those of us without $20 or so billion to invest, comparable portfolios and investing strategies are still accessible.  Our company, ClearPath Wealth Management, strives to create endowment-style portfolios for high net worth investors (liquid net worth of $1 million or more), and the boom of index funds have made these types of allocations available for investors with as little as $25,000 in their accounts.  For the latter, there are several exchange-traded and mutual fund products available to track each of the following indexes: Hedge Fund Index, Commodity Trading Advisors Index, Real Estate Investment Trust Index, and Listed Private Equity Indexes.  Adding positions like these to your current stock/bond portfolios can provide you with an asset allocation similar to the University super-endowments.


While past performance is never indicative of future results, the likes of Harvard and Yale haven’t suffered a “lost decade” and seem to be adjusting to the “new normal” in an admirable fashion.



The information provided here is for informational purposes only, is not intended as investment advice, and should not be construed as a recommendation with regard to investment decisions.  Past performance referenced here is no guarantee of future results.  Source for table and data: Yale University and Harvard University Annual Reports.
Written By:
Drew Carlin
ClearPath Wealth Management
170 Westminster St, 9th Floor
Providence, RI 02903