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Learn an Investment Lesson from an Ivy League’s Mistakes

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Your debt load in retirement will determine who’s in control, you or someone else. My father taught us that lesson. I remember when he brought my sister and me as kids to the bank to set up a savings account. The teller politely counted our money and printed the sum on the first page of the passbook. It wasn’t much, of course, but it was a beginning, and that was what was important to my dad. Through the years, we continued to save, and over time the numbers began to add up. This was in the late ’70s, so interest rates were much higher than they are today. By adding up all the interest lines, I learned real fast what compound interest means, and that simplicity is sophisticated.

Debt is compounding in reverse. One of the country’s top Ivy League universities borrowed $1.5 billion over the past decade to cover new projects. In the last fiscal year (6/30/08 to 6/30/09), its endowment lost 27%. Compare this with a more appropriate balanced fund like Vanguard Wellesley, which was down only 3.6%. Prior to the market crash, approximately 4.7% was withdrawn from the endowment to cover operating costs. All things being equal, that same 4.7% would be approximately 6.7% this year. But this year, programs and classrooms once thought to be untouchable are dealing with major cuts. Both draw rates are above the 4% recommended by Richard C. Young & Co., Ltd. What were the managers doing with such an aggressive portfolio? These are experts, right? Simplicity is sophisticated.

The university is certainly not in the poorhouse. But not many of us can borrow like they can. Who’s going to bail you out in times of trouble? Debt will be a constant drag in retirement, and for many will increase when adjustable rate mortgages reset. You don’t want to be forced to sell an asset at the wrong time to cover debts. Reduce your debt as you work to get your financial house in order. If you need a plan, or help, give me a call at (800) 843-7273. And remember, simplicity is sophisticated.

E.J. Smith is Managing Director of Richard C. Young & Co., Ltd. an investment advisory firm managing portfolios for investors with over $1,000,000 in investable assets.

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E.J. Smith

Editor-in-Chief
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com.