Harvard and Yale Check In

Many big schools have endowment funds, where they keep and grow money for their future use. These institutions' funds haven't all performed spectacularly, but Harvard and Yale are standouts. I've written before about why we might want to invest like Harvard and Yale, and what I read a while ago only confirmed that. You see, for the year ending June 30, 2008, during which the S&P 500 dropped about 15%, Harvard's endowment fund was reportedly up 8.6%, and Yale was up 4.5%.

Of course, it's not so easy for us to invest just like these funds -- because they don't just invest in simple stocks and bonds, like we tend to do. They have been known to invest 10% to 20% of their assets in private equity, which is not available to Joe Six-Pack -- or us. And they also invest in hedge funds, which are typically limited to those of great means. Furthermore, they have been growing over the years, in part, via donations. (Are there many alumni sending in checks to your brokerage account? I didn't think so. Mine either.)

So a big part of the reason for their outperformance over the stock market is that they're invested in much more than the stock market. We, too, can look beyond it -- if we dare. Many small investors go for real estate, for example. (I've written about why you might want to think twice about that.)

We could invest in commodities, too, like they do, but unless we know a lot about commodities, we'll be at a disadvantage. Commodities can be extremely volatile and risky. Look at the DWS Commodity Securities A (SKNRX) fund, for example. Not only does it charge a 5.75% sales load upon purchase (which would immediately eat $575 of a $10,000 investment), but it has a bit of a rocky record, too -- up 35% in 2007 (yay!), but down 40% so far in 2008 (boo!).

Or, you could ...
So are you out of luck? Not necessarily. Remember that while Harvard and Yale may have built up their endowments to be worth more than $20 billion or $30 billion, a few others, like Warren Buffett, have built entities worth far more. Buffett's Berkshire Hathaway (NYSE:BRK-B), for example, has a market cap well north of $170 billion, and he has recommended simple index funds for most investors. (You could also just invest in his company, if it meets your needs.)

A significant portion of Buffett's wealth has come from smart and long-term investments in stocks. You, too, can win with individual stocks. Check out the 10-year average annual returns of the following companies (and remember that the S&P 500, in this period, was roughly flat):

Data from Yahoo! Finance.

See? You don't have to find obscure little penny stocks in order to earn solid returns. These big names have performed rather well, relative to the market -- and that's really what counts.

Although it's easy to forget right now, the stock market has averaged about 10% per year over long periods. That's enough to turn $50,000 into more than $870,000 over 30 years. But if you manage to eke out an extra percentage point over those 30 years, by investing in top-notch mutual funds and stocks, you'll accumulate more than $1.1 million.

Small differences can make big differences -- and the difference might be able to pay for your grandchild to attend Harvard or Yale! (If you fall short, note that some of these prestigious schools are now charging no tuition fees to admitted students whose parents make less than $100,000 per year -- thanks to their hefty endowment funds.)