The Boston Globe (with a hat tip to Barry Ritholtz) ran an article looking at how Harvard managed it cash over the course of the last couple of decades. This cash is for short term needs not the endowment fund.
For years the short term cash was invested into the endowment fund which is a longer term pool of money. All through the 1990s this worked well as the short term cash grew from $250 million to $2 billion then doubled under Larry Summer’s watch and ultimately grew to $6 billion at the peak.
Jack Meyer and Mohamed El-Erian after Meyer warned of the risk in investing short term cash like it was long term money but those warnings fell deaf perhaps because things were going so well with the endowment. Then the crisis happened, certain markets ceased up, normal inter-market relationships broke down and correlations went up.
According to the Globe article the short term cash dropped by $1.8 billion and the University had to issue some bonds to help make up the difference. Additionally the University has had to change plans and delay spending on certain projects because of the the hit to the short term cash.
There was a rationalization of sorts in the article noting that the the short term cash would have never grown to what is presumably now $4.2 billion had it been invested conservatively so despite the hit the school is still better off. I say no sale there because they were living a $6 billion lifestyle in 2007 as opposed to a $1 billion lifestyle (the value of the short term cash had they invested it conservatively all along was unquantified in the article).
In the middle of the panic, maybe a little over a year ago, Jim Cramer made a comment about taking any money you need in the next five years out of the stock market. I’ve heard him circle back to that comment several times since. A comment I made then and which I will repeat now is that five year money should never be invested in stocks.
Specifically money for things like a house, college education or any other one-time specific event in the next few years should not be invested into risk assets. There can be no reasonable expectation of a full recovery in such a narrow window of time. Most of the time this wouldn’t come home to roost but when it does it is usually very bad. This differs from the goal of paying out a small monthly or quarterly income over 30 or 40 years that is long term money that with proper planning should not be totally derailed by one downturn. Compare that to a $50,000 college fund that drops to $30,000 one year before private school tuition is due.
If you read the Globe article you may conclude there was some hubris here along with a too smart for their own good dynamic and this is a behavior that repeats over and over but this is a simple rule of thumb. Short term money should not be in risk assets. If the yield are low that is unfortunate but one thing you have probably read is that rates at zero has been a catalyst for money to move into stocks and I have no doubt this has occurred but what will be the fallout if stocks go down and people get caught with the wrong type of money exposed to a 30% (or worse) decline?
How would you feel in that scenario? Now compare that to the frustration of a 1 basis point money market yield. I’ll take the latter, thank you.