Seven-year old Riley Taylor was eating chocolate chip pancakes for breakfast.  I put a piece of paper in front of her.  It contained a list of seventeen countries.  Each represented a different country’s stock market index fund.

“Riley, please pick five of these countries,” I asked.  She chose Japan first. “I chose Japan because I really like dumplings,” she said.  Riley picked Italy next.  “Gelato comes from Italy,” she said.  “And I really like Gelato.”  She followed up with three other countries:  Canada, Singapore and France.

Riley
Riley Taylor - photo by Andrew Hallam

I then asked Riley and her eight-year old sister, Mackenzie, to select a series of index funds that represented five different asset classes or stock market sectors.  I wanted to back-test their portfolios to see if they would have beaten the performance of Harvard’s endowment fund over the past ten years.

That might sound like a silly quest.  After all, Ivy League colleges, like Harvard, hire some of the world’s best investment managers.  They watch the market like hawks, keeping an eye on global interest rates.  They try to pick the best stocks and the strongest asset classes.

But beating the Ivy League pros isn’t as tough as you might think. For example, over the ten-year period ending December 31, 2017, Vanguard’s Balanced Index (VBIAX) trounced the collective returns of the Ivy League endowment funds.  The balanced index gained a compound average return of 7.13 percent per year over the 10-year period.  That beat Harvard, Yale, Dartmouth, U of Penn, Columbia, Cornell and Brown University.  Only Princeton did better.  Its endowment beat Vanguard’s balanced index by just 0.05 percent per year.

Vanguard’s Balanced Index Beats The Ivy League Club
2008-2018

College Average Compound Annual Return $10,000 Would Have Grown To…
Harvard 4.35% $15,308
Yale 6.63% $19,001
Princeton 7.18% $20,004
Dartmouth 6.13% $18,129
University of Penn 6.0% $17,908
Columbia 7.05% $19,763
Cornell 4.07% $14,902
Brown 5.27% $16,712
Average Ivy League Return 5.84% $17,639
Vanguard’s Balanced Index Fund (VBIAX) 7.13% $19,911

Vanguard’s Balanced Index contains about 60 percent U.S. stocks, 40 percent U.S. bonds.  But I haven’t compared apples-to-apples.  After all, college endowments are usually more diversified.  Enter 7-year old Riley Taylor and her 8-year old sister, Mackenzie.  They don’t know anything about the stock market.  But that doesn’t mean they can’t beat the pros with a more diversified portfolio of low-cost index funds.

I asked the girls to pick ETFs from five fund categories:  International Equities; U.S. All-Cap; Real Estate; Industry ETFs; and Government Bond ETFs.  I gave them a list of every available iShares fund for each respective category.

Of course, the kids didn’t know what they were doing.  Riley, for example, selected the iShares 3-7 Year Treasury Bond ETF (IEF) because it contains the number seven.  “I’m seven years old and seven is my favorite number,” she said.  She chose the iShares Mortgage Real Estate Capped ETF (REM) because, “my best friend’s name is Irem.  She’s from Turkey. REM [the ETF’s ticker symbol] reminds me of her.”

Mackenzie
Mackenzie Taylor - Photo by Andrew Hallam

I asked the sisters to choose the following number of funds from each category:

  • 5 International Equity ETFs
  • 5 U.S. All-Cap ETFs
  • 2 Real Estate ETFs
  • 3 Industry ETFs
  • 5 Government bond ETFs

I used portfoliovisualizer.com to back-test their performance. Riley’s portfolio earned a compound annual return of 5.48 percent over the past 10 years. Despite being distracted by her chocolate chip pancakes, her picks beat the endowment teams from Harvard, Cornell and Brown University.

Eight-year old Mackenzie did even better.  Her portfolio earned a compound annual return of 6.26 percent over the past ten years.  She would have beaten Harvard, Dartmouth, University of Pennsylvania, Cornell and Brown.  Only Yale, Princeton and Columbia would have beaten Mackenzie.  And they didn’t win by much.  The top performer, Princeton, beat Mackenzie by an average compound return of just 0.92 percent per year.

Seven and Eight Year-Old Girls Beat The Ivy League Club
2008-2018

College Average Compound Annual Return $10,000 Would Have Grown To…
Harvard 4.35% $15,308
Yale 6.63% $19,001
Princeton 7.18% $20,004
Dartmouth 6.13% $18,129
University of Penn 6.0% $17,908
Columbia 7.05% $19,763
Cornell 4.07% $14,902
Brown 5.27% $16,712
Average Ivy League Return 5.84% $17,639
Riley’s Portfolio 5.48% $17,049
Mackenzie’s Portfolio 6.26% $18,352

If we average the Taylor sisters’ performances, they would have beaten the average return for the Ivy League professionals.  Riley and Mackenzie would have turned $10,000 into $17,700.  The Ivy League endowments would have turned the same $10,000 into $17,639.

You might think the girls got lucky. But I disagree. Their father, Dave, doesn’t follow the stock market. That’s why I asked him to pick the same number of funds (as his daughters did) in each of the five respective categories. It took him about 40 seconds while he was making pancakes. His portfolio averaged a compound annual return of 8.01 percent.  He would have beaten every Ivy League endowment fund over the past ten years.

I asked my wife to try it next.  Her portfolio would have averaged a compound annual return of 6.16 percent per year.  She would have also beaten the average return of the Ivy League endowments.

If you have young children, try this at home. Ask them to pick 20 funds from the categories below:

  • 5 International Equity ETFs
  • 5 U.S. All-Cap ETFs
  • 2 Real Estate ETFs
  • 3 Industry ETFs
  • 5 Government Bond ETFs

*Try This At Home!

iShares International Equity Large/Mid Cap
[Select 5]
iShares All-Cap
[Select 5]
iShares Real Estate
[Select 2]
iShares Industry ETFs
[Select 3]
iShares Gov’t Bond ETFs
[Select 5]
EWJ:  Japan DVY: Select Dividend IYR: US Real Estate ITB: Home Construction EMB: Emerging market bonds
EWZ: Brazil ITOT: Core S&P Total US
IWV: Russell 3000
ICF: Cohen & Steers REIT ETF IEO: Oil and Gas Exploration SHY Short Term Treasury (1-3 yr)
EWY: South Korea IUSG: Core S&P 500 Growth REM: Mortgage Real Estate IEZ: Oil and Gas Equipment SHV: Short-Term Treasury
EWG: Germany IUSV: Core S&P 500 Value USRT: Core US REIT IYG: US Financial Services IEF: 7-10 Yr. Treasury
EWT: Taiwan IYY:  Dow Jones US ETF REZ: Residential Real Estate IAT: Regional Banks IEI: 3-7 Yr. Treasury
EXC: Canada
EWH: Hong Kong
IWV: Russell 3000   IAI: Brokers and Dealers TLT: 20+ Yr. Treasury
EWU: United Kingdom     IAK: Insurance TLH: 10-20 Yr. Treasury
EWA: Australia
EWL: Switzerland
    IBB: Biotech  
EWP: Spain     IHI: Medical  
EWQ: France     IHF: Healthcare  
EWI: Italy     IHE: Pharmaceuticals  
EWS: Singapore     ITA: Aerospace
IYT: Transport
 
EWM: Malaysia     SOXX Semiconductor  
EZA: South Africa     IGM: Technology  
EWD: Sweden     IGV: Tech Software  
      IGN:  Tech multi-media  

Use portfoliovisualizer.com to enter the funds’ ticker symbols.  Allocate 5 percent to each of their selected 20 funds. Set the start date at January 1, 2008, with the end date at December 31, 2017. 

Once again, I didn’t provide a list of “winning” funds to choose from.  These funds represent all of the iShares ETFs with 10-year track records in each of the five categories above. Some of the funds were dogs.  Many of them found their way into the sisters’ portfolios.

But Riley and Mackenzie still beat Harvard–and the average return of America’s most famous college endowment funds.  If you build a diversified portfolio of low-cost index funds, you’ll likely do the same over the next ten years. 

Seven-Year Old Riley Taylor’s Portfolio

Symbol Fund Allocation
EWJ iShares MSCI Japan ETF 5%
EWC iShares MSCI Canada ETF 5%
EWI iShares MSCI Italy Capped ETF 5%
EWS iShares MSCI Singapore Capped ETF 5%
EWQ iShares MSCI France ETF 5%
IYY iShares Dow Jones US ETF 5%
DVY iShares Select Dividend ETF 5%
ITOT iShares Core S&P Total US Stock Mkt ETF 5%
IWV iShares Russell 3000 ETF 5%
UISV iShares Core S&P US Value ETF 5%
REM iShares Mortgage Real Estate Capped ETF 5%
IYR iShares US Real Estate ETF 5%
IYT iShares Transportation Average ETF 5%
ITB iShares US Home Construction ETF 5%
IEZ iShares US Oil Equipment&Services ETF 5%
IEF iShares 7-10 Year Treasury Bond ETF 5%
SHV iShares Short Treasury Bond ETF 5%
EMB iShares JP Morgan USD Em Mkts Bd ETF 5%
SHY iShares 1-3 Year Treasury Bond ETF 5%
TLH iShares 10-20 Year Treasury Bond ETF 5%

Eight-Year Old Mackenzie Taylor’s Portfolio

Symbol Fund Allocation
EWL iShares MSCI Switzerland 5%
EWC iShares MSCI Canada ETF 5%
EWH iShares MSCI Hong Kong 5%
EWS iShares MSCI Singapore Capped ETF 5%
EWA iShares MSCI Australia 5%
IUSV iShares Core S&P 500 Value 5%
DVY iShares Select Dividend ETF 5%
ITOT iShares Core S&P Total US Stock Mkt ETF 5%
IWV iShares Russell 3000 ETF 5%
IUSG iShares Core S&P 500 Growth 5%
IYR iShares US Real Estate 5%
ICF iShares Cohen & Steers REIT ETF 5%
IEO iShares Oil and Gas Exploration 5%
IEZ iShares Oil and Gas Equipment 5%
IYG iShares US Financial Services 5%
TLH iShares 10-20 Yr. Treasury 5%
TLT iShares 20+ Yr. Treasury 5%
IEI iShares 3-7 Yr. Treasury 5%
IEF iShares 7-10 Yr. Treasury 5%
EMB iShares Emerging market bonds 5%

Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas