Why your stock and bond index funds outsmart Wall Street's best and brightest

By Mark Hulbert

College and university endowments lag a basic diversified portfolio

U.S. colleges and universities would, collectively, be $468 billion richer today if they had fired their investment managers 20 years ago and instead invested their endowments in low-cost index funds.

If the dismal past performance of mutual funds hadn't already convinced you of how difficult it is to beat the stock market, the market-lagging performance of U.S. college and university endowments should be enough. Some of Wall Street's best and brightest minds manage their endowments, and even they fall short.

This would be an important investment lesson at any time, but especially in October, when most colleges and universities report their endowments' investment returns for the recent fiscal year (which ends June 30). Because many of these endowments are worth billions of dollars (Harvard University's, for example, totals more than $50 billion), their dollar-denominated gains look impressive. But in percentage terms, their returns are mediocre - or worse.

Twenty-five institutions so far have reported their fiscal 2025 returns, according to Pensions and Investments. That sample is big enough to allow me to report the endowment returns over various longer periods through mid-2025, and they are summarized in the chart above. (I tallied the average fiscal 2025 returns in P&I's endowment tracker and average returns for prior fiscal years from the National Association of College and University Business Officers, or NACUBO.)

The benchmark with which the chart compares the average endowment is a portfolio that allocates 70% to a stock index fund and 30% to a bond index fund. This is appropriate, since this portfolio has a similar risk profile, with a standard deviation of annual returns over the past two decades that is similar to the average endowment. The 20-year annualized return of the average endowment is 6.7%, versus 8.8% for the 70% stock/30% bond portfolio.

Total college and university endowment assets 20 years ago were $267 billion, according to NACUBO. The $468 billion more that these endowments would be worth today is calculated on the assumption that endowments over the last two decades had appreciated at an 8.8% annualized rate, rather than 6.7%. (This back-of-the-envelope calculation glosses over many details, but gives you an idea of how much endowments' market-lagging returns cost them.)

Higher risk, lower reward

Colleges and universities may object that I'm comparing apples and oranges. The average endowment is far more diversified than a stock-and-bond portfolio, for example, with more than 50% currently allocated to so-called alternative investments - private equity, venture capital, real estate and the like. Because of this diversification, wouldn't the average endowment be significantly less risky than a 70% stock/30% bond portfolio, and therefore, perform much better on a risk-adjusted basis?

No. The average endowment is almost certainly riskier than suggested by the standard deviation of its annual returns. I discussed it in a recent column, noting that it had to do with the difficult-to-value alternative assets in which the average endowment invests. That often leads these assets' volatilities to be underreported - a practice known as volatility laundering.

The bottom line? The markets are extremely difficult to consistently beat over the longer term. But that's good news, not bad. Think of it this way: What other pursuit in life is there where you can beat the best and the brightest by investing in index funds and doing nothing else for 20 years?

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: Why your S&P 500 index fund might be more risky than the internet bubble

Also read: This stock and bond portfolio won't give you bragging rights - but it does make you money

-Mark Hulbert

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

10-14-25 0919ET