UPDATE: The Lamborghini lesson that Harvard's endowment fund can teach you
By Amit Sinha
Why the benefit of the investment version of exotic, expensive sports cars is so limited
Individual investors can learn from a subtle but significant change the new investment chief at Harvard University's $37 billion endowment is making.
While commentators focused on a disappointing investment performance in the last fiscal year (https://www.bloomberg.com/news/articles/2017-09-19/harvard-ceo-says-8-1-return-signals-deep-structural-problems), they missed a monumental shift in focus announced by N.P. "Narv" Narvekar: to look at overall portfolio performance rather than the individual components.
This explicitly acknowledges two key aspects of investing. The first is that the objective is overall performance against goals, and not whether asset managers outperform narrowly defined benchmarks. The second is that an investment portfolio is a complex system that is affected by more than the sum of the component funds that the portfolio is invested in.
Recognizing this can help streamline a portfolio and lead to greater clarity, transparency and certainty of meeting objectives.
Both a large investor like Harvard and an individual investor saving for retirement can get carried away by the mystique and high octane of exotic investments or investment managers who promise outsize returns. While these managers and strategies may deliver returns in isolation, the benefit may be limited by an investor's risk tolerance, time horizon or factors outside anyone's control.
To better understand this, think of an investment portfolio as a complex system, like traffic. Samuel Arbesman, a researcher of complex systems, points out in a thought-provoking interview on Farnam Street (https://www.farnamstreetblog.com/2016/11/samuel-arbesman-biological-physics-thinking/) that looking at how a particular driver applies brakes doesn't help with understanding a traffic jam.