Kristin Reynolds was featured in a U.S. News article on the benefits of maintaining regular cash flows from a donor base. Read the article here. 

College endowments, pooled funds of money that are crucial to fulfilling the ongoing financial demands of higher education institutions, might seem a little disconnected from the finances of the average retail investor at first glance. While the sums of money endowment funds handle are indeed far vaster than any typical retirement portfolio — the top five U.S. university endowments run between around $20 billion to $40 billion — there are several helpful takeaways that investors of all types can use to manage their nest eggs more prudently. Here are seven important lessons to learn from how college endowments are managed.

Factor in withdrawals.

What investor wouldn’t like to turn their life savings into a portfolio that comfortably lasts their entire life? That’s how colleges look at their endowments, except universities never plan to die, so the endowment is meant to last into perpetuity. This means that over time, endowments need their spending to fall below rates of return. Portions of the endowment can have very strict rules around use, with a certain percentage of funds required to be spent on scholarships, fellowships, research and faculty positions. In recent years, college endowments have used around 4.5% of their funds annually on spending, according to the colleges and universities surveyed in The National Association of College and University Business Officers’ 2019 NACUBO-TIAA Study of Endowments released on Jan. 30. This is close to the 4% rule of retirement spending, which is meant to provide some much-needed income in investors’ golden years while still preserving as much capital as possible.

Factor in inflation.

The 4% rule of thumb for individual retirees has an important and oft-overlooked caveat. Following your first 4% withdrawal, you should adjust withdrawals each subsequent year to comport with inflation. Inflation, a notorious and largely invisible tax that eats away at purchasing power over time, is the second major cost — aside from actual spending — that successful college endowments must factor into their projections. Annual spending generally clocks in around 4.5% and the five-year average inflation as measured by the Commonfund Higher Education Price Index report is 2.4%. The 10-year average endowment return of 8.4%, as measured by the 2019 NACUBO-TIAA Study of Endowments, easily clears the typical bar seen in recent years. In other words, these obscure pools of money in higher education have easily met their fundamental long-term goal of preserving so-called “intergenerational equity” over that period.


Yale University’s chief investment officer David Swensen is arguably the most successful and well-regarded money manager in the industry — and it’s not because he’s a good stock picker. Instead, Swensen discovered the remarkable power asset allocation can provide for patient, long-term investors. In 1989, Yale’s endowment had almost 75% of assets in U.S. stocks, bonds and cash. Nowadays, those categories constitute only about 10% of the fund. Foreign equities, as well as the less liquid areas of real estate, venture capital, hedge funds, leveraged buyouts and natural resources, constitute the bulk of its portfolio. Swensen’s brilliance was in realizing that by sacrificing some liquidity, alternative assets would allow both higher expected returns and lower volatility. Average investors certainly don’t have all the same opportunities Yale is afforded, but the principles of asset allocation and diversification are very applicable.

Mind governance and have an investment policy.

“The biggest risk faced by endowment boards, and most investors, is not the economy or the Fed — it’s the board,” says Lucius McGehee, executive vice president at Argent Trust Co., which serves as the outsourced chief investment officer for several foundations, including many university foundations. “It’s the investors and their behavior. That’s why a well-crafted investment policy statement is so important. It can serve as your road map to help guide you through the challenges and unknowns that will always lie ahead,” McGehee says. While multibillion-dollar endowments clearly need some parameters, goals and rules in place, it’s not a bad idea for an individual investor to set up some long-term goals and guidelines, either. It’s also wise to consider the governance of any companies in which you invest.

Long time horizons are powerful advantages.

Berkshire Hathaway’s (ticker: BRK.B, BRK.A) CEO Warren Buffett has occasionally argued that his greatest competitive advantage as an investor is his limitless time horizon. It’s a potent point that some of the most successful university endowments — and individual investors, for that matter — use to their advantage. “Great managers, such as Yale’s David Swensen, understand endowments have a perpetual time horizon, with relatively little need for liquidity currently,” says Mike Romero, vice president and relationship manager with Heritage Trust Co. in Oklahoma City. “The manager doesn’t have to focus solely on spending needs over the next year or two, but can consider strategies with much longer time horizons. Consequently, great endowment managers — through prudent investment and spending policies — provide for current needs, along with creating equity among future generations.”

Contribute, contribute, contribute.

Many common sense laws of personal finance and investing also overlap with the practices seen in successful endowments, and the enormous long-term benefits that regular cash injections provide are no exception. “Organizations that can count on the consistent cash flows of a donor base can often extend their investment time horizon and take more risk,” says Kristin Reynolds, the co-leader of NEPC’s Endowment and Foundation practice and an NEPC partner. Individual investors who need their portfolios to provide a certain amount of regular passive income clearly face a smaller universe of suitable securities to choose from — and generally, this will mean more conservative, lower-return asset classes that individuals without those needs wouldn’t be constricted to.

Not all opportunities are created equal; use the tools you have.

The 10-year returns among the largest college endowments — those with assets of more than $1 billion — were higher than all the smaller tranches of college endowments. Institutional endowments of more than $1 billion returned 9% annually over 10 years in the decade ending in 2019, while college endowments of $25 million and less earned just 7.7% during the same period, according to the most recent NACUBO-TIAA Study of Endowments. This is because larger endowments have investment opportunities that smaller schools don’t, including access to private equity and venture capital deals that can prove enormously rewarding. Stanford University in California made more than $300 million from an early stake in Alphabet (GOOG, GOOGL), for instance. While individuals don’t have all the investment opportunities larger investors do, exchange-traded funds increasingly offer easy access to commodities, real estate, foreign stocks and other asset classes. Regardless of your net worth, investors of all sizes can be successful by simply utilizing some principles mentioned here and other widely accessible tools of modern finance.