What is an Endowment?
The public is taught to save for retirement. Institutions are built to last forever. Their playbooks are not the same.
How to Build Your Own Endowment
This question is almost always met with superficial answers: “Buy an ‘alternative’ ETF,” or “Allocate 10% to gold.” These answers mistake the tools for the framework. An endowment is not a list of assets, rather, an endowment is a process.
The assets we own—private equity, timberland, venture capital—are simply the output of that process. The “profound chasm” is not that the public cannot buy these assets; it’s that they are not taught the process for building a portfolio in the first place.
This is that process. It is the 5-step institutional framework for engineering a portfolio. This is the blueprint.
Step 1: Define Your “Spending Rule” (Your Mandate)
An endowment does not begin by asking, “What should we buy?” It begins by asking, “What must this portfolio do?”
We start with our liabilities. The entire investment strategy is reverse-engineered to solve for a specific, non-negotiable mandate:
- Fund the Present: Meet the university’s Spending Rule (e.g., 5.0% of the endowment’s value) to fund its operating budget.
- Preserve the Future: Grow the principal by at least the rate of inflation, forever. This is our directive of Intergenerational Equity.
These two goals create our hurdle rate—the minimum return we must achieve. Not achieving them is an endowment’s true risk.
The Retail Translation: An individual must do the same. You must act as the fiduciary for your own (and your family’s) future. You must define your personal mandate.
This is not a vague goal like “retirement.” It must be a number. What is the real, after-inflation dollar amount you need your portfolio to produce each year? That is your Spending Rate. What is the timeframe? If it is for multiple generations, your mandate is perpetuity.
From this, you can calculate your personal hurdle rate. This is the single most important number you will ever write down. It is the “problem” your portfolio is being built to solve.
Step 2: Build Your “Policy Portfolio”
Once the hurdle rate is defined, our investment committee designs the master blueprint: the Policy Portfolio.
This is not a 60/40. The 60/40 is a simple, pre-packaged product. The Policy Portfolio is a long-term, strategic solution.
We build it by “hiring” capital for specific “jobs” in the portfolio. The main jobs are:
- Growth: The engine. Hired to compound at high rates and beat our hurdle (e.g., public and private equity).
- Inflation Hedging: The protector. Hired to perform well when inflation is the primary threat (e.g., real assets, infrastructure, commodities).
- Deflation Hedging: The ballast. Hired to appreciate during a “risk-off” crash, providing liquidity to buy cheap Growth assets (e.g., long-duration Treasuries).
The Retail Translation: You must create your own written Policy Portfolio. This is your master plan. Based on the hurdle rate from Step 1, you will set long-term target percentages for these “jobs.”
Perhaps your mandate requires a 40% Growth, 30% Inflation Hedging, 20% Deflation Hedging, and 10% “Dry Powder” (cash) allocation. The numbers are secondary to the process. This written document is your constitution. It governs all future decisions.
Step 3: Source “Best-in-Class” Assets
With the blueprint in hand, our job is to find the best “workers” for those “jobs.” In the institutional world, this means deploying capital to the world’s best private equity, venture, and hedge fund managers.
The Retail Translation: This is the chasm. An individual cannot access these managers. But you can source “proxies”—liquid, public assets that functionally do the same job. This requires more work than buying a single “balanced” fund.
- For the “Growth” Job: You can hire global public equities, or tilt toward factors like “value” and “quality” that have a history of durable returns.
- For the “Inflation Hedging” Job: You can hire listed real estate (REITs), listed infrastructure funds, or commodities.
- For the “Deflation Hedging” Job: You can hire long-duration government bonds.
The goal is not to perfectly replicate the Yale portfolio. That is impossible. The goal is to functionally fill the roles defined in your Policy Portfolio with the best-in-class liquid tools available to you.
Step 4: Embrace Illiquidity (Your “Time” Asset)
An endowment’s greatest competitive advantage is our time horizon. Our capital is permanent. This allows us to be patient and harvest the illiquidity premium—the extra return markets pay for providing long-term capital.
The Retail Translation: An individual’s time horizon is their single greatest, and most squandered, institutional-grade asset. You are not a “forced seller” to meet quarterly earnings. You have the power to lock up capital.
This is the most difficult step because it is a mental one. The public is taught that illiquidity is a bug; you must re-frame it as a feature.
- Create Mental Illiquidity: Commit, in writing, to not touching a portion of your portfolio for 10, 20, or 30 years. This is your “core” capital. Do not look at its price. This “lock-up” is a feature you are giving yourself.
- Source Physical Illiquidity (If Appropriate): For accredited investors, this may mean accessing private real estate or private credit funds. But for most, the true proxy is simpler: pay off your mortgage. This is a long-term, illiquid, inflation-hedged investment in a real asset.
Step 5: Rebalance with Discipline
The final step is the act of governance. My investment committee meets to rebalance. We are unemotional. We look at our Policy Portfolio (Step 2) and see where the market has taken us.
If our “Growth” sleeve has performed well and is now 50% of the portfolio instead of its 40% target, we sell that 10% no matter how bullish we feel. We then buy the asset class that is “out of favor” (e.g., our “Deflation” sleeve) to bring it back to its target.
This is not market timing. It is the opposite. It is the systematic, unemotional act of enforcing the policy. It is the mechanical process of selling high and buying low.
The Retail Translation: This is the hardest act of personal governance. You must set a simple rule (e.g., “I will rebalance once a year, on my birthday”) and execute it with discipline. You are not “timing” the market; you are returning your portfolio to the strategic blueprint you created in a moment of clarity.
The Unvarnished Truth
The Endowment Model is not a secret list of hot alternative funds. It is a governance structure.
It is a durable, five-step process for defining a mandate, building a blueprint, sourcing the tools, and executing the plan with discipline. This process is what creates generational wealth. It was guarded. Now, it is yours.
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