Investing is an essential aspect of building and maintaining your wealth. However, traditional stock and bond portfolios may not be enough to generate the kind of returns and downside protection high-net-worth individuals and their families need to achieve their long-term financial goals. 

The stock market is in uncommon territory now, as well: Old standbys like the classic 60/40 portfolio allocation for retirees are no longer reliable enough to depend on. Thankfully, however, we have other options: Endowment-style investing’s emphasis on alternative investments, true diversification, and a long-haul approach can still offer potentially solid returns over time.

This article discusses these topics:

  • What is endowment-style investing?
  • How it can differ from other types?
  • Why it better diversifies portfolios.
  • Common long-term advantages.

What Is Endowment-Style Investing?

Endowment-style investing has been used by the ‘big boys’ for decades:  Endowments, insurance companies, sovereign wealth funds, etc.  This is an investment strategy that looks beyond the typical stocks and bond portfolio toward a range of alternative investments. These may include assets such as private equity, hedge funds, real estate, and commodities. Traditionally, endowments have been investment funds set up and successfully implemented by organizations like universities and non-profit organizations.

The idea has always been to try to generate long-term returns to support their operations and missions. However, endowment-style investing is not limited to institutions only. High-net-worth individuals and families could also benefit from this strategy since it provides better diversification, possibly reduced risk, and access to a broader range of investment opportunities.

How It Can Differ From Other Types

One of the key advantages of the endowment model is what I refer to as ‘true diversification’; the spreading of your investments across multiple asset classes, sectors, industries, or geographic regions to reduce risk and increase potential returns. By ensuring that few of your investments directly correlate with each other, you could minimize the impact of market fluctuations on your portfolio.  In other words, there is value in having some of your investments ‘zig’ while others ‘zag’.  

Traditional investment portfolios are often heavily weighted towards stocks and bonds, leaving investors exposed to the kind of market volatility we saw in 2022. By adding alternative investments to your asset allocation, endowment investing provides a better balance, which tends to reduce your risk and increase possible returns over the long-term.

However, endowment-style investing is not without its risks. Alternative investments can be complex and illiquid, which can make them difficult to understand and access. They often require higher minimum investments and longer lock-up periods, as well, so to make things easier, consult your Personal CFO (P-CFO) for assistance.

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Why It Better Diversifies Portfolios

The traditional approach to diversification involves investing in a mix of equities and fixed-income securities. While this approach could be effective in reducing risk, it could also limit returns. The endowment approach, on the other hand, includes a broader range of asset classes, such as real estate, private equity, and hedge funds. These assets are not typically available to individual investors (and have low correlations with traditional assets), making them valuable additions to your portfolio.

Another benefit of the endowment approach is that it can allow for more active management of your assets. Endowments typically have a team of investment professionals who monitor the markets and adjust the portfolio as needed. This active management can help to optimize returns and ensure that the portfolio remains well-diversified and market-weather-ready.

Common Long-Term Advantages

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Alternative investments might offer greater stability than traditional ones for your financial plans. For example, income-producing real estate can provide a steady source of recurring revenue, typically holding its value against inflation. At the same time, private equity investments may offer the potential for significant capital gains. 

Real estate investments can also provide strong returns, particularly if you invest in markets and segments that are experiencing growth. These assets can offer the potential for both rental income and capital appreciation, making them an attractive option for investors seeking income and growth.

Generally speaking, these assets, as well, tend to hold their value over time. While traditional investments, such as stocks and bonds, can be negatively impacted by inflation, alternative assets sometimes benefit from inflationary environments.

In addition to offering greater stability, leveraging alternative assets as part of an endowment approach to investing can also offer higher potential returns than traditional investments. Sometimes you win by not losing. Private equity and venture capital investments, for example, may offer the potential for significant capital gains, assuming that the underlying companies are successful.

In summary, there are multiple potential advantages to an endowment investing approach:

  • Stable income stream(s). It can provide a stable income stream to support the growth of your nest egg. By investing in a diversified portfolio of assets, including stocks, bonds, and alternative investments, endowments often generate consistent returns over the long term and often perform better than individuals do.  
  • Protection against inflation. By investing in a diverse mix of assets, your endowments can benefit from the growth potential of stocks and alternative investments while also having a fixed income stream from bonds.
  • Diversification. Varying your investments across various asset classes helps to spread risk across different types of holdings. This, in turn, tends to reduce the overall risk to a portfolio.
  • Potential capital appreciation. Since you are investing in stocks and alternative investments, endowments can benefit from the growth potential of these assets and potentially generate higher returns than bonds.
  • Legacy-building. By investing in a long-term strategy, it’s possible to generate returns that can support you and your loved ones for many years to come. This can help to safeguard your wealth, possibly for generations to come. 

“The goal with wealth preservation is to produce the best possible investment returns consistent with your time frame and tolerance for taking investment risk.” —CEG Worldwide

If you believe endowment-style investing could be a good fit for you and your family, we should discuss its possible pros and cons for your individual financial situation. To learn about Silberman Wealth Strategies’ style of endowment investing and more, contact us and schedule a meeting.

Mitch Silberman

More about the author: Mitch Silberman

With over 30 years of experience, using his investment expertise and analytic skills, Mitch has helped his clients pursue their dreams with confidence and financial security. He is the President and Founder of Silberman Wealth Strategies, Inc., which is a fee-based Registered Investment Advisor.