By Tim Brennan, Treasurer & CFO, UUA
Here’s a question I get a lot: why doesn’t The UU Common Endowment Fund, LLC (UUCEF) put more of its assets into US stocks? And conversely, why keep investing in international stocks? After all, US stocks are outperforming international markets.
Here’s why: the UUCEF follows an investment strategy often called “the endowment model.” It is described very well in a recent paper from the Fund’s investment consultant, New England Pension Consultants: “The Disease of Doubt.” The key elements of the endowment model are:
- A long-term perspective
- Diversification among asset classes (stocks, bonds, hedge funds, private equity, etc.)
- Diversification across geographic regions globally
- Regular rebalancing to long-term asset class targets
Why diversification? Take a look at this chart that looks like a crazy quilt. It shows investment returns by asset class in each year from 2005 to 2015. Notice that no two years look alike – in fact, there are no patterns. Except one perhaps: top performing asset classes don’t stay there for long.
If one could successfully predict which asset class would be on top each year, your investment performance would be amazing. This is called market timing. Problem is market timing is a fool’s errand. While it is possible to notice when the valuations of a market are getting rich, there is no way to predict precisely when the market will shift. Here’s what David Swensen, the highly successful manager of Yale’s $25 billion endowment fund, had to say:
Many investors “engage in counterproductive performance chasing that results in buying high and selling low. Buying yesterday’s winners and selling yesterday’s losers inevitably hurts tomorrow’s performance.”[1]
Dalbar, a leading market research firm, annually publishes its Quantitative Analysis Of Investor Behavior. This report shows year after year that mutual fund investors pile into funds as they reach their peak and bail near the bottom. The depressing result is that these investors underperform the market – and by a lot. The reason? What Dalbar calls “herding.” That is, following what everyone else is doing which inevitably leads the investor to “buy high/sell low.”
So the next time you are tempted to move your congregation’s investments to a US stock ETF, take a look at the crazy quilt chart and ask yourself: How will I know the right moment to get out of US stocks and move into the next winning asset class?
Our approach remains patiently focused on diversification with a long-term outlook.
[1] Unconventional Success: A Fundamental Approach to Personal Investment, David F. Swensen, 2005.