What’s Your Financial Strategy?

For years, we have been told by the mass media, financial experts, and dear old “Uncle Bob” that the only way and best way to save for retirement is to invest in the stock market. For our purposes, “stock market” refers to stocks, bonds, mutual funds, and ETF/index funds.

strategy man writing on paper

We have been told that we should invest all our money in a “diversified” portfolio of stocks, bonds, mutual funds / index funds for the 30-40 years of our working life. We should ride out all the high’s and low’s of the market along the way and do our very best to remind ourselves not to pull our hair out as we watch dips of up to 50% eat into our hard-earned portfolio.

Then, at the end, we are told to savor our retirement while not worrying about those same dips occurring again during our lifetime since, in the end, the market will “correct itself” and we should just “ride it out”.

The “Good Ol’ Days”

In the old days (30+ years ago), this strategy had a lot of merit. The old rule of thumb is to deduct your age from 100 to find out the allocation of stocks – bonds in your portfolio (i.e. a person 70 years of age would have a 30% allocation of stocks and 70% bonds in their portfolio). Back then, bonds had a much higher return than they do today with relatively low volatility.

See the historical annual global corporate bond yield from the website:  Marketwatch.com


As you can see global bond yields peaked in 1980 at approximately 13%. Since then annual bond yields have progressively declined to today’s current yield of approximately 0.25%. The advice was great in the 70’s thru the 90’s when the global annual bond yield averaged between 6-13%. This was a nice low risk return for your money. As stated in the attached Marketwatch article, current bond yields are at a 120-year low and with no end in sight.

Other “Risk-Free” Investments

But wait what about T-Bills? Aren’t they supposed to be a “risk-free” investment tool since it is backed by the government? Let’s take a look at those historical 52-week T-Bill returns as shown at macrotrends.net


Like the average global bond yields graph above, T-Bills peaked in 1980 at approximately 17% and have progressively declined since then. In the 70’s thru the 90’s when the 52-week T-Bill yield averaged between 4-17%, it was not a bad risk-free return! Most financial projections assume a historical annual return on 7-8% so if you can get that by investing in bonds and T-Bills then that is a win-win!

Even as recently as 2005. T-Bills yield averaged at about 5%. Since then the market has bottomed out to the current yield of 0.10% (yes, I said 0.10%!).

With these type of returns and a historical inflation rate of 3.22% (per inflationdata.com), it makes a person wonder how to properly diversify a portfolio?

How the Rich Invest

One way to improve your wealth is to observe how the rich invest their money, learn why they invest a certain way, and potentially emulate it. University endowments are some of the world’s wealthiest institutions and invest like many of the world’s wealthiest people. Both the wealthy and endowments want income to fund their lifestyle indefinitely and to outperform the market in any potential condition.

For reference and inspiration, let’s look at what the Yale Endowment funding is currently doing. For those of you not familiar with it, the Yale Endowment Fund is the world’s 2nd largest endowment fund (Trailing only the Harvard University Endowment Fund) at $31.2B and has a reputation as one of the best-performing investment portfolios in American higher education.

The fund is managed by Chief Investment Officer David F. Swensen.  Swensen is an alumnus (Yale ’80) who has managed the fund for the past 32 years. Per the Yale News, the Yale Endowment Fund, under his leadership, has earned an average 13.5% annual return. He is the author of Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment and Unconventional Success: A Fundamental Approach to Personal Investment

Over the past 25 years, Yale dramatically reduced the Endowment’s dependence on domestic securities (i.e. stocks, bonds, cash, etc.) by reallocating assets to nontraditional (alternative) asset classes. In 1990, over 70% of the Endowment was committed to U.S. stocks, bonds, and cash. Today, domestic securities account for approximately 10% of the portfolio, while foreign equity, private equity, absolute return strategies, and real assets represent nearly 90% of the Endowment.

Per the Yale News, below is a snapshot of their current asset allocation for the 2021 fiscal year:

Before we go further, let me provide some definitions in case you are uncertain what some of these terms mean:

Absolute Returns

Absolute Return are essentially hedge funds. Hedge funds look to earn a positive return in both bull and bear markets with less volatility than stocks and index funds.

Per the John Hancock investment website, absolute returns do not compare its performance to a benchmark like an index fund does. As shown in the chart below, if an index fund earns a negative return yet beats the benchmark it is compared against, the index fund is considered to have had a successful year.

Absolute returns use a different approach. Absolute returns seek to earn a consistent positive return at lower levels of volatility.

How is it done? How absolute return funds differ is in the tools they use to implement its strategy. A wide variety of financial instruments are used to achieve a positive return w/ less volatility (i.e. stocks, bonds, currencies, derivatives, puts/calls, etc.).

What absolute return strategies have in common, and can be seen in the chart below, is that the goal is to obtain positive returns with a low correlation to traditional stocks, bonds, index funds markets. For those not familiar with this term, correlation is a statistical measure that describes how investments move in relation to each other.


If 2 assets have a correlation of +1.0, this means the 2 assets are perfectly correlated (positive correlation) and will generate returns in the same direction. Meaning if 1 asset is down 10% for the year, there is a high probability that the 2nd asset will also be down 10%. 

If 2 assets have a correlation of -1.0, this means the 2 assets are negatively correlated and will generate returns in the opposite direction. Meaning if 1 asset is down 10% for the year, there is a high probability that the 2nd asset will also be up 10%. 

If 2 assets have a correlation of 0, this means the 2 assets have no correlation at all.

Why should we care about correlation? The reason we care is because finding assets with a negative correlation acts as a buffer, a hedge against uncertainty. This can be helpful when developing a portfolio because in order to plan for uncertainty and still maintain a positive outcome, assets that negatively correlate are needed to achieve that objective.

The traditional approach of having a mix of stocks and bonds for portfolio diversification is simply not enough to prevent losses. Having a portion of their portfolio in absolute return strategies is a potential way to limit loss and generate gains in a wide variety of conditions.

Venture Capital

Per Investopedia, Venture Capital (VC) is a type of equity financing that give entrepreneurs and small companies the ability to raise funding (seed capital) before they have begun operations and before they have earned a profit. These tend to be high-risk / high-return scenarios depending on a company’s size, assets, and development stage.

Several different types of businesses are funded from dotcom companies to peer-to-peer finance companies. They generally open a fund, take in money from high-net-worth individuals, companies seeking alternative investments exposure, and other venture funds. Money is then invested into a number of smaller startups known as the VC fund’s portfolio companies.

Like all pooled investment funds, venture capital funds must raise money from outside investors prior to making any investments of their own. A prospectus is given to potential investors of the fund who then commit money to that fund. All potential investors who make a commitment are called by the fund’s operators and individual investment amounts are finalized.

From there, the venture capital fund seeks investments that have the potential of generating large positive returns for its investors. This normally means the fund’s manager or managers review hundreds of business plans in search of potentially high-growth companies. The fund managers make investment decisions based on the prospectus’ mandates and the expectations of the fund’s investors.

Venture capital funds differ fundamentally from mutual funds and hedge funds in that they focus on a very specific type of early-stage investment. All firms that receive venture capital investments have high-growth potential, are potentially risky, and have a long investment horizon.

Venture capital funds take a more active role in their investments by providing guidance and often holding a board seat on the companies they invest in. VC funds therefore play an active and hands-on role in the management and operations of the companies in their portfolio.

Many of these funds make small bets on a wide variety of young startups, believing that at least one will achieve high growth and reward the fund with a comparatively large payout at the end. This allows the fund to mitigate the risk that some investments will fold.

Venture capital funds are raising more money than ever before. According to financial data and software company PitchBook, the venture capital industry invested a record $136.5 billion in American startups by the end of 2019.

Leverage Buyouts

Per Investopedia, A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet acquisition costs. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company.

The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

LBOs are conducted for three main reasons. The first is to take a public company private; the second is to spin-off a portion of an existing business by selling it; and the third is to transfer private property, as is the case with a change in small business ownership. However, it is usually a requirement that the acquired company or entity, in each scenario, is profitable and growing.

LBO’s can be complicated and take a long time to complete. As a result, assets can be tied up for a long time.

How the Yale Endowment Fund benefits from this could not be determined with the information found online.

My speculation (and is pure conjecture since I could not find information to corroborate it) is that the endowment fund provides loans to the companies looking to acquire another company and the return is based on the interested rate charged on the loans. 

Natural Resources Investing

Per Investopedia, Natural resource investing covers anything mined or collected in raw form. Starting with their raw form, natural resources may go through further processing (i.e. cutting a tree into 2x4s, turning oil into gasoline, extracting gold from ore, etc.) or are cleaned up, packaged, and sold (a barrel of oil, a bottle of water, a ton of coal). If it can be mined, cut, or collected from above or beneath the earth’s crust, natural resource investors look for a way to buy-in.

The pool of investable natural resources is growing as the world population requires more and more resources.

There are several reasons why natural resources make attractive investments now and in the future:

  • Rising Incomes: As incomes increase in developing countries, the demand for precious metals, building materials, and other natural resources tends to increase as well. In general, demand generally leads to rising prices.
  • Global Infrastructure and Repair: Developing countries need gravel, lumber, steel, and other materials to build roads and other public works. This building spree is being prompted by population growth and increasing global urbanization. Also, much of the infrastructure in developed nations require updating on a regular basis. The longer it takes to make repairs and updates, the larger the spending will be.
  • Political Buying: Several nations have begun buying up natural resources to ensure a consistent supply of crucial raw materials. This buying sometimes takes the form of political agreements, open market orders, or foreign acquisitions. This makes governments another driver of demand.
  • Store of Value: Many natural resources, especially precious metals, act as a storehouse of value. These resources become more attractive when inflation threatens investors and can be used as a hedge against inflation.

There is also an argument that natural resources have a low correlation with the stock market. However, as more and more of the activity in natural resources is being driven by investment and speculation, this lower correlation could potentially be driven higher.

Domestic / Foreign Equities, Bonds, and Cash:

This is traditional investing as you and I know it. It uses stocks, bond, ETF’s, index funds, mutual funds, etc. to invest in the open market.

Interesting point: The Yale Endowment Fund only has approximately a 20% investment exposure to these financial instruments.

Stocks tend to be very volatile. While upside potential can be seemingly infinite, if fortunate enough to buy the right stock, values can fluctuate by 50% (or more) in a down market.

If looking to generate positive returns independent of market conditions, a person needs to also invest in negative correlation assets.

Real Estate:

I could not find any details on what the Yale Endowment Fund specifically invests in. For this article and given the size of the fund, I assume it will be in commercial real estate development.

Real estate typically has a negative correlation with the stock market. Plus depending on the type of real estate deal, both a consistent income stream and appreciation upon sale of a property could be generated from this asset.

Key Takeaways:

  • The wealthy invest in a broad range of alternative assets to mitigate risk and volatility.
  • Some of the wealthy have world-class resources to identify and exploit inefficiencies in alternative asset classes.
  • Not only do the wealthy have resources to find opportunities but they also have entrepreneurs and companies reach out to them since they have large resources to leverage.
  • Most important of all, some of these asset classes can even be leveraged by everyday people like you and me to further enhance your portfolio! 😊

That’s right! While some of these asset classes are likely out of the reach of the average investor (i.e. venture capital funding and leveraged buyouts), it is possible to further diversify one’s portfolio using some alternative assets within our reach.

Here are some alternative assets opportunities you may want to consider:

Real Estate

There are several ways a person can add real estate exposure to one’s portfolio:

Physical Asset Purchase – one way to gain exposure is to physically own real estate properties. The good news is if a deal can be structured properly and one does their homework, real estate can provide significant returns in the form of rental income (can you say consistent cash flow 😊) and appreciation over time. The downside is this usually involves a significant upfront capital expenditure to initially purchase the property.

Crowdfunding– This is a relatively new way to gain real estate exposure and, in some cases, only costs a few hundred dollars to start. Crowdfunding platforms like Fundrise, Crowdstreet, Realty Mogul offer this exposure. The downside side is some (i.e. Crowdstreet) require you to be an accredited investor while others like Fundrise, can get you started for as little as $500 and you can periodically add to your portfolio over time. I have been keeping an eye on crowdfunding for a couple of years now and plan to write about my experiences soon.

Real Estate Syndication – Real Estate Syndication is when a group of investors pools their money together to purchase a property. Usually there is a main person or group who has done all the leg work and will manage the property. The other group members are effectively “silent partners” and passively invest in the property. I just started researching this type of investment and plan to write more about this in the future.

REIT’s – Purchasing shares in Real Estate Investment Trusts (REIT’s) in the form of stock purchases (i.e. Realty Income) is another way to gain real estate exposure. The downside is that you are essentially making a stock purchase and therefore are exposed to its volatility. The upside is that REIT’s are required by law to pay out a minimum of 90% of its income to investors in the form of dividends. As a result, REIT’s tend to pay out higher than normal dividends.


Precious Metals

Owning physical precious metals (i.e. gold, silver, and platinum) is a great hedge against inflation and is a known to be a storehouse of value.

In addition to owning physical metal, investors can also gain access through the derivatives market, metal ETFs and mutual funds, as well as owning mining company stock shares.

For example, Warren Buffet has historically not purchased precious metals or stock in mining companies…. until very recently.  In August, Warren Buffet bought 20 million shares of Barrick Gold, a gold mining company.

If the GOAT value investor has changed his tune about investing in precious metals, it makes one wonder why and what he knows that others don’t?

Start or Invest in a Side Business

Something a person can do while working their current career that could potentially payoff huge in their journey to financial independence is starting a side business or being a silent investment partner in a business (i.e. “mom ‘n’ pop” business, online business, franchises, LLC’s etc.).

Not only are there potential passive income opportunities but also tax advantages with owning a business. The downside is that upfront costs can be high and active work may be needed depending on what business is chosen. The upside is a potentially consistent income stream that can not only speed up your journey to financial independence but also be used to open doors to other investment opportunities.

P2P Lending / Crowdfund Investing:

A newer strategy is person to person (P2P) lending and crowdfund investing. Essentially P2P lending is one person lending another person or business money. Essentially you act as the “bank” when loaning out money.

Crowdfunding is a consortium of random people who decide to invest in a business. The people looking for seed money can post a request on social media. The advantage for entrepreneurs is the ability to raise money without giving up control to venture capitalists. The advantage for investors is obtaining an ownership stake in a new business. The disadvantage is if the business dissolves you will potentially be out of your entire investment.

I have not done a lot of research into this and plan to do more soon.



There is a lot we can learn from watching how the wealthy are investing their capital. There are more tools available to the average investor than most people realize in order to further diversify their retirement portfolio, improve returns, and reduce volatility. The final question a person needs to answer in order to determine their financial strategy is: What is my investor DNA? What types of investments not only appeal to me but are also things I intuitively understand and could excel at? This will be the topic of another article! Until then…… Live the Life You Want, Love, and Deserve! 😊