Smart Money or Dumb Money?
Quick Take
Major universities, with their multi-billion-dollar endowments, have once again cornered themselves by overloading on illiquid alternative investments.
Lack of liquidity when things go south is a real risk for all investors.
Golden rule of investing: never put more into illiquid investments than you can afford to have locked up, or lose, in the next downturn.
Smart Money or Dumb Money?
Are some of the supposedly best managed, most informed investment funds really smart investors? Last month, we discussed so-called alternative investments and their challenges for most investors. Jason Zweig, writing for the WSJ (read the full article here: The Ivy League Keeps Failing This Basic Investing Test - WSJ), recently discussed how Ivy League and other large universities, with their multi-billion-dollar endowments, have once again cornered themselves by overloading on illiquid alternative investments. Despite the harsh lessons of the 2008–09 financial crisis, these institutions are repeating history—and offering a cautionary tale for the rest of us.
Key Takeaways
Elite universities keep repeating the same mistake.
During the 2008–09 financial crisis, endowments were caught short of cash because they had overloaded on illiquid assets. Despite that painful lesson, they’ve doubled down on hedge funds, private equity, and venture capital—leaving only a tiny fraction of their portfolios in liquid, tradable securities.Portfolios are dangerously skewed.
According to Zweig, the typical large endowment now holds only about 2% in cash, 6% in bonds, 8% in U.S. stocks, and 16% in international stocks. The rest—roughly two-thirds—is tied up in private funds that can’t be sold quickly.Cash crunch meets real-world pressure.
When the Trump administration threatened to cut federal funding, universities like Brown, Harvard, and Northwestern suddenly scrambled for liquidity. Despite their multibillion-dollar endowments, they had to borrow heavily or sell private equity stakes at a discount just to raise cash.Liquidity is the lesson—and it keeps being ignored.
Zweig notes that liquidity is “priceless” in bad times, yet institutions keep underestimating it. As Laurence Siegel warned back in 2007, endowments overloaded with illiquid assets risk running out of cash in a downturn. That warning came true in 2008–09, and history is repeating.Coming soon to your 401(k).
The WSJ reported that Harvard recently sold $1 billion in private-equity funds at a 7% discount to their stated value. Goldman Sachs just invested a similar amount to gain access to T. Rowe Price’s vast retirement fund network. Wall Street, of course, is busy repackaging these deals and promoting them to guess who? Expect alternatives to show up soon in your 401(k)-target date retirement fund.The cautionary message for all investors.
If even the “smart money” can blow it by ignoring liquidity, individual investors need to be extra careful. The golden rule: never put more into illiquid alternatives than you can afford to have locked up when you suddenly need cash.
What It All Means
The Ivy League’s troubles aren’t just about elite universities—they’re a mirror for all investors. The smartest portfolios in the room can still fall victim to overconfidence, short memories, and a dangerous disregard for liquidity. For everyday investors, the lesson is clear: a well-designed, diversified marketable stock and bond portfolio isn’t boring, it’s financial freedom. When the next storm comes, and it eventually will, investors who respected liquidity will be the ones who survive to carry on.
As always, we’re here to help evaluate whether a particular investment strategy is aligned with your unique needs and long-term objectives.
Contact us at 865-584-1850 or info@proffittgoodson.com
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