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The Ivy League Secret to Retiring Rich

If you want to turn thousands into millions, you've got to invest like the best. But you don't have to pay $50,000 a year for an Ivy League education. This lesson is absolutely free -- and could make you rich.

For years, endowment funds at major universities have scoured every nook and cranny, searching for the best places to invest their money. Endowment managers like Yale's David Swensen and Harvard's Jane Mendillo have put together track records of extraordinary performance that compare favorably to Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) Chairman Warren Buffett. They did it by looking outside the traditional box of stocks and bonds -- and in the process, they've brought completely new types of investments into the mainstream.

Investing with trailblazers
Just 10 years ago, investors lived and breathed the stock market. With the run of great years in the 1990s, there wasn't much reason to look beyond U.S. stocks to make money. Furthermore, taking on other types of investing, such as trading commodities futures or investing in real estate partnerships, was complicated and often required separate accounts and specialized investment advice.

But despite the allure of stocks back then, endowments looked for other promising opportunities. For instance, as early as 1999, Yale's endowment managers were investing in real estate, oil and gas properties, and timber. They bought into private equity and hedge funds. They crossed borders and invested in international stocks, which were then out of favor.

Eight years later, Yale's endowment had just 11% allocated to U.S. stocks. Real estate, hedge funds, and private equity investments dwarf its stock holdings. And the majority of its stock investments are in international companies.

Beyond diversification
The success of these large institutional investors has changed the way ordinary investors put their money to work. Although access to hedge funds and direct ownership of commercial real estate is still limited to the wealthy, the rise of real estate investment trusts, as well as exchange-traded funds that focus on commodities, have brought these investments to the masses. Over time, these new asset classes have worked their way into recommended asset allocations.

There's no doubt that diversifying their portfolios have helped endowment funds weather turbulent times. For instance, consider the Yale endowment's 2001 fiscal year. Here's how some of the market's biggest stocks were doing:

Stock

Total Return:
6/30/2000 to 6/29/2001

Cisco Systems (Nasdaq: CSCO  )

(71.4%)

Microsoft (Nasdaq: MSFT  )

(8.8%)

Intel (Nasdaq: INTC  )

(56.2%)

General Electric (NYSE: GE  )

(6.4%)

ExxonMobil (NYSE: XOM  )

13.6%

Source: Yahoo! Finance.

You'd think from these results, and the fact that the S&P as a whole dropped almost 15%, that the endowment had a rough year. But diversity saved Yale's endowment, which rose 9.2% in that year.

Be ahead of the crowd
But the real lesson from the success of endowment funds isn't in diversification for its own sake. Instead, what you can learn from institutions like Yale is that following the crowd won't earn you consistently superior returns. Identifying investment trends early on is what will help you beat benchmarks over time.

What's more, you don't necessarily have to look at exotic investment vehicles to secure a comfortable retirement. In the 1980s, Yale's endowment was primarily invested in U.S. stocks -- which performed very well in the aftermath of stagflation. When stocks are attractively priced, they definitely deserve a substantial place in your portfolio.

Similarly, as other assets like real estate and commodities have become more expensive, you can expect to see endowment funds move on to the next lucrative area.

To make the most of your retirement savings, keep your eyes open for novel and enterprising investment opportunities. You don't need an Ivy League education to retire rich -- just don't invest with the herd.

For more on managing your retirement money, read about:

Helping you retire rich is what the Fool's Rule Your Retirement newsletter is all about. We'll give you great investment ideas that will multiply your savings into a strong nest egg for your golden years. Check it out now with a free 30-day trial.

Fool contributor Dan Caplinger didn't go to Harvard or Yale, but he still wants to retire rich. He owns shares of Berkshire Hathaway and General Electric. Microsoft, Intel, and Berkshire Hathaway are Inside Value selections. Berkshire Hathaway is also a Stock Advisor pick. The Motley Fool owns shares of Berkshire. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is rich in spirit, rah, rah.


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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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