Daniel Wildermuth - Wise Money: Using the Endowment Investment Approach to Minimize Volatility and Increase Control

Copyright 2012 by Daniel Wildermuth. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

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WHY WRITE, OR READ, ANOTHER BOOK ON INVESTING? THERE ARE countless books on the market, so hasnt enough been said on the subject already? Besides, what has been said hasnt appeared to be very helpful. Some investors believe the past few years highlighted the futility of investment planning and possibly even investing in general. The horrendous losses suffered by many in the 2008 global stock market crash seemingly confirmed the shortcomings of so many investment approaches.

The facts are ugly. The U.S. stock market declined nearly 40 percent in 2008 and dropped 55 percent from its high on October 9, 2007, to its low on March 6, 2009. Possibly even worse for many investors, these declines were the second major market crash of the decade. The broad stock market indexes produced negative returns over a 10-year period. Weak bond returns over the same period didnt help. The result? Too many investors earned zero or negative returns over an entire decade while enduring terrible volatility.

But this is only part of the investment story. While many individual investors struggled, college endowments generally enjoyed success over the same period. These organizations recognized years ago the many limitations of traditional investment approaches that depend almost entirely on stocks and bonds. The endowments developed and implemented a very different investment approach generally referred to as the endowment model. This investment strategy seeks to increase return and decrease volatility.

By nearly any measure, this approach has been a tremendous success. It has performed very well relative to virtually all other models over any reasonable time frame and has consistently proven its value over very long periods of time. To be fair, no model, strategy, or method of investing outperforms in every environment or circumstance, and the endowment model is no exception. But this investment strategy has shown remarkable consistency in outperforming in a wide variety of market conditions including bull and bear markets, markets that favor various sizes of companies, markets that benefit value or growth stocks, conditions that advance international versus domestic stocks, inflationary periods, and many other types of economic and market conditions. In addition, the models outperformance has also been achieved with a lower chance of experiencing losses relative to many common strategies.

While even some institutions lagged in their adoption of the approach, today some form of the endowment model nearly always anchors the investment strategy employed by college endowments, institutions, and wealthy investors worldwide. Unfortunately, most individual investors continue using dated, simplistic strategies that have yielded very poor results and a very wild ride, especially during the past decade.

This brings me to my reason for writing this book. My experience and research has convinced me that smaller investors can replicate many of the same principles and practices successfully employed by institutions and wealthy investors. No individual investor will duplicate the exact performance of the endowments. Even different endowments dont earn the same results as one another. Yet I believe the basic principles and strategies can be transferred to much smaller portfolios, and their adoption can provide individual investors attractive rewards. Hopefully, your belief that this may be true will provide you enough motivation to find out more.

A small warning: While none of this material is particularly challenging or revolutionary, applying the strategy may require an adjustment to your thinking. This strategy departs from the traditional, tired approach of using only U.S. stocks and bonds. It doesnt just tweak the existing logic, it completely discards major parts of it. This doesnt mean its difficult to understand or implement. But it is a different approach. With that caveat, I invite you to explore a new, and I believe much better, investment approach that may help you significantly better yourself financially while also increasing your confidence and comfort with your finances.

THE YEARS 2008 AND 2009 TREATED THE AVERAGE INVESTOR VERY poorly. Stock market losses in 2008 in 2009.

The tremendous losses and volatility of these months and years left most investors not only frustrated but also often completely bewildered and overwhelmed. In addition, many supposedly safe investments suffered rough rides. In 2008, even investment-grade corporate bonds lost 5.3 percent. Almost the only place to hide seemed to be certificates of deposit or government bonds because they were the only assets seen as riskless during a time of tremendous uncertainty.