Rarely do you see a headline in a mainstream newspaper containing the three words, "Yale," "Harvard," and "Losers," but that's exactly what happened last week in The Wall Street Journal.

The Journal certainly wasn't talking about the Universities' academic prowess or even their athletic exploits; rather, it was the disappointing performance of their once invincible endowment funds. The value of their endowments each dropped by 30 % for the 12 months ending June 30, 2009. By comparison, a typical plain-vanilla endowment allocation of 60 % stocks and 40 % bonds lost only 13 % during that period, according to the Journal.

What's newsworthy about these losses is that Yale had pioneered an unorthodox approach to endowment investing that worked spectacularly for years (and was copied by Harvard), but like many investment ideas, it eventually ran into a brick wall. Under the leadership of David Swensen, Yale's portfolio mix changed dramatically. For example, the allocation to private equity rose from 3.2 to 20.2 %; real assets - timber, real estate, and the like, rose from 8.5 to 29.3 %; and hedge funds went from zero to 25.1 %. To accomplish this mix, the allocation to domestic stocks and bonds dropped from 71.9 to 14.1 %, according to a March 2009 article from Portfolio.

Essentially, Swensen argued that endowment funds should avoid traditional stocks and bonds and, instead, invest in higher yielding and less liquid assets that more closely match an endowment fund's long-time horizon. That strategy was a winner for years and despite the 30 % loss last year, both Yale and Harvard's portfolios are still ahead of where a traditional 60/40 allocation would have put them.

Here's the point - even the best and the brightest such as Swensen eventually stumble, if only temporarily. Likewise for us, the cost of long-term investment success may be the periodic pain of significant declines.  

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron's, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable or not available.