Two Endowments Compared

How two retirees beat Harvard, sort of

Thought of Jim Gust's Endowment woes post as we gathered income-tax info. Unlike Harvard, this retiree and his bride have no need to tighten their belts. Dividends and interest from our mini-endowment actually rose slightly last year. Unless dividend cuts get really vicious, we expect about the same level of spending money for 2009.

We "beat" Harvard because ours is an old-style endowment. As our parents and their peers taught us back in the 1950s, we collect and spend our dividends and interest. We never dip into principal. Well, hardly ever.

Harvard (and Yale and just about every other endowment) march to a different drummer. They invest for total return, adding income to principal and spending a percentage of the total each year.

Total-return investing was born of necessity. As the notion of growth stocks took hold, dividend yields dropped below bond yields. In the 1960s, trying to get along on endowment (or trust) income became increasingly unattractive. Total-return investing provided a good alternative. But even then, old fogies warned that total-return investors would be sorry some day:

"Sure, you'll do fine most years. But once in a great while the Dow's going to dive big time. What's your four percent or five percent of 'total market value including accumulated income' going to look like then?"

Well, as the Ivy League universities and other endowed institutions are learning, getting along on one-quarter or one-third less than last year is no fun.

College and university endowments aren't going to change their total-return ways. But mightn't retirees sleep better if they invested 1950s style?

There's just one catch. While Harvard and Yale tap their endowments for four or five percent each year, the dividends and interest from our mini-endowment normally amount to no more than three percent.

What would you advise retirees? Is stability worth the sacrifice?