I’ve been writing for The Motley Fool since the 90s, and I’ve offered the following advice countless times: Don’t keep the money you think you’ll need in the next five years (if not more years, be more conservative) in the stock market, as it can be volatile in the short term.
This can sometimes be difficult to do, especially if the market is in the middle of a bull run, but ignoring the advice can burn you badly. A recent story in the news drives this lesson home. As a funny saying goes, “If you can’t be a good example, be a horrible warning.”
Image source: Getty Images.
Preparing the ground — in Colorado
The University of Colorado is a large school with four campuses, the largest of which is in Boulder. Total enrollment was recently 66,266 students. Last year, the university had about 9,000 professors and instructors. The university, known locally as “CU”, is Colorado’s third-largest employer, employing approximately 36,500 people and boasting more than half a million alumni.
UC’s operating budget for the current academic year is $5.55 billion.
As you may know, colleges and universities also have investment and endowment accounts. At the end of fiscal year 2021, for example, Harvard and Yale had the largest endowment funds, valued at $53.2 billion and $42.3 billion, respectively. Most schools have far less than that, and in recent years the University of Colorado’s portfolio has been valued at $2 billion to $3 billion.
What went wrong? Hourly
For the 2020-2021 fiscal year, the University of Colorado’s investment returns were exceptionally strong – with growth of 24.4%, or approximately 3.4 times the school’s historical average return. This was clearly great news, and the university announced that approximately $436 million would be made available for one-time strategic needs, such as investment in technology and infrastructure, making UC more affordable for Colorado students, and supporting and retaining faculty and staff. To its credit, the university noted that “as the funds will be spent over time, market volatility in fiscal year 2021-22 and beyond will impact the amount available.”
Well, 2022 turned out to be more volatile than expected. At the time of this writing, the S&P500 was down nearly 20% from its 52-week high, and the Nasdaq was down almost 33%. Market volatility in 2022 was many more than expected and had a huge windfall impact – resulting in a $120 million decrease in funds available to the University of Colorado.
University of Colorado President Todd Saliman explained in an interview with the Denver Post, “A year ago, we saw this as a unique opportunity to leverage our market gains, and we we did. But we didn’t realize all the gains and now we’re in a position where those gains have gone down and we can’t spend the money that we don’t have.”
Vice President and Chief Financial Officer Chad Marturano told online publication CU Connections: “The substantial decline in market returns means we will have to slow down in some cases and reassess our plans in others. The main thing is that we have less money to spend. on accelerating the strategic plan compared to what we had planned a year ago.”
As you can imagine, the professors, students and other people who were looking forward to all the impending improvements are very unhappy.
lessons for us
Having a shortfall of $120 million is a horrible situation, and it’s due to a mistake that we small investors can and often make – leaving the money we’ll need in the years to come on the stock market. Many people who had planned to buy a home at the end of 2022, for example, saw their down payment funding cut, and many who thought they had raised enough to retire in 2022 saw their nest egg dwindle. 20%, 30% or more, jeopardizing their future financial security and likely requiring additional years of work.
Moving the money you’ll need in a few years out of stocks is clearly a sensible thing to do, but it can also be a very difficult thing to do, if your stocks have skyrocketed and you expect them to continue to rise. do it. Withdrawing your dollars from such growth requires discipline and an understanding that the stock market can be volatile and can produce unexpected results at unexpected (and inopportune) times.
The more you understand what to expect equity investment, the better you’ll probably do. A key thing to predict is volatility. Don’t let it burn you.