Learning investing lessons from the crash

Although many people and organizations have recovered from the crash of 2008, the event still sent shockwaves through the country, including the sectors known as financial and nonprofit. Even Ivy League universities, where ivy isn’t the only green in abundance, took a hit.

During Fundraising Day in New York 2013, sponsored by the New York City chapter of the Association of Fundraising Professionals (AFP), Gregory J. Muth of Columbia University said that everyone learned a chastening lesson, even Yale University, which has enjoyed huge success with its investment approach, known as the Yale Model.

Muth said that regardless of model, universities were hurt because they kept little of their money in cash, and in fact large Ivy League endowments fared worse.

He outlined the following lessons:

  • Modern portfolio theory and asset allocation are not dead. Alternatives can and do play an important role in a well-constructed and diversified portfolio.
  • The difficulties of large endowments don’t reflect a breakdown of the principles of asset allocation; rather, they reflect failure of endowment managers to properly diversity and plan for extreme events.
  • Endowments must model and prepare for extreme events, evaluate whether the classification of their assets genuinely reflects true diversification and appropriate a much larger portion of their portfolios to cash and other liquid assets.
  • If assets are being invested, there must be an investment policy. A basic policy identifies the assets available for investing, defines general objectives, sets allocation parameters and clarifies the organization’s tolerance for risk.