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The Endowment Investment Model

by AOG Wealth Management

wise-money-180x300Recently I discussed the challenge of producing significant income in the current environment from a portfolio using only traditional asset classes. I also included an article from the Wall Street Journal (originally published on March 4, 2013) entitled “Say Goodbye to the 4% Rule.” With dividend yields for the S&P 500 and the 10 year treasury fewer than 2% annually, and CD checking and savings interest rates below that, I continue to expect a follow up article entitled “Say Goodbye to the 3% Rule.” Many advisors and analysts have been musing on that thesis over the last year.

For over a decade, AOG Wealth Management has focused on applying the lessons gleaned from the “Super” Endowment Funds of major universities like Harvard, Yale, and Stanford into a modified format for individual investors. Two years ago, we affiliated with Kalos Financial as our Broker/Dealer. The Founder and CEO of Kalos Financial, Daniel Wildermuth, is a recognized national expert on this process, which he has described perfectly in his book Wise Money. Below are two quotes from a not-yet-published article by Daniel, highlighting potential advantages of higher income and less expected volatility by prudently mixing non-traditional asset classes like real estate and private equity with the more traditional stock/bond/cash allocation.

“The portfolios of larger endowments generally share several common characteristics. Investments focus on multiple different asset classes that are expected to provide strong returns net of inflation and possess minimal performance correlations with each other. Many of the asset classes enjoy higher expected returns than equities and often are expected to perform well during inflationary periods which can boost returns. But often their key contribution is reduced performance correlation. The diversification into asset classes with less correlation results in less expected downside risk for the combination of performance oriented assets within the portfolio.”

“Perhaps as significantly, the potential for illiquid investments to positively impact portfolio volatility was also recognized. Illiquid investments are rarely valued with high frequency. While their values may actually change on a regular basis, the lack of mark-to-market pricing generally limits their pricing volatility which can add the highly desirable element of stability to portfolios particularly during times of high volatility.” [Wildermuth, Daniel. Risk Management Paper. n.d. TS.]

Daniel Wildermuth addressed our clients at our 2013 Mid-Year Update, and we hope to have him back again soon. Copies of his book Wise Money are available at Amazon. Clients can receive complimentary copies in our office.

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