Economics Professors Push Safe Investing Strategies

Like most of the investment community, Harvard’s vaunted economists were hit hard by the recent financial crisis and ensuing downturn.

Textbook magnate N. Gregory Mankiw’s stock portfolio dipped. Economics department chair and hedge fund adviser John Y. Campbell got out too early. Even conservative investor Claudia Goldin suffered a drop in her retirement fund.

And while investors around the world scrambled to get out of risky investments, the mega-minds at Harvard took a more reserved approach—they stuck to their strategy.

None of the three academics interviewed for this article acknowledged spending much time checking the stock listings.

But for those pursuing more active investment strategies, all three classroom superstars agreed, less is more.

PRINCIPLES OF INVESTING

“I am a long-term buy-and-hold investor, as I don’t think I am smart enough to time the market,” says the professor of the largest economics course at Harvard and author of “Principles of Economics.”

Mankiw has gained national prominence through his popular textbooks and as one of President George W. Bush’s chief economic advisers.

But outsmarting the markets, Mankiw says, requires huge quantities of time poring over listings—time that he says he prefers to devote to academic pursuits.

Mankiw’s simple investment portfolio consists of about two-thirds stocks and one-third bonds, balancing what he considers the high risk of equities with more dependable fixed income.

Even when his portfolio took a hit during the crisis, he maintained the ratio by investing more cash into stocks in order to compensate for what he had lost in the market decline. This “rebalancing” is Mankiw’s main active portfolio strategy. Otherwise, he says, he is relatively passive.

He believes in the higher risk and returns of equities, but his stock investments are widely diversified, including international holdings, and are mostly in low-cost index funds.

Mankiw practices what he preaches in his textbook. “I don’t think anyone should put all their money in a company they work for, or in the country they happen to live in,” he says. He is invested not only in the U.S. but also in Europe, Asia, and emerging markets.

AN ACTIVE ADVISER

Economics Department Chair Campbell, who specializes in asset pricing, is no stranger to active investing.

He is on a short list of Harvard economists also advising in the private sector, contributing his expertise at the hedge fund Arrow Street Capital. And, as a member of the Harvard Management Company, he is the only economics professor at Harvard helping to oversee the largest private endowment in the world.

But when it comes to his own money, Campbell sticks to what he knows best. Despite a more hands-on methodology, he acknowledges that “most of the time, letting it sit there and not worrying about it is the best approach.”

Campbell avoids stocks—not his expertise, he says—and focuses on less risky assets. His conservative strategy dates back to the mid-90s, when he says he and his Yale adviser Robert J. Shiller predicted that the booming market would cool off.

Unfortunately for Campbell, his prediction was a few years ahead of the market, and he missed out on the gains of the late ’90s.

But the tech bust in the beginning of the decade would eventually prove him right, and his investments remained safe.

With the recent rebound of the stock market, Campbell says stocks are looking more attractive. And young people are in the best position to invest, he says, because their capital lies mostly in future earnings. On the other hand, most do not have the job security of a tenured professor. “I have one of the safest jobs you can have,” he admits.

PLAYING IT SAFE

Claudia Goldin, professor of economics and director of the National Bureau of Economics Research’s Development of the American Economy program, comes from “a family of people who are not risk takers,” she said.

As an economic historian specializing in labor economics, Goldin is well-versed in the history of hard times.

Appropriately, her approach is very low-risk. Nearly all of her investment capital is in conservative retirement funds.

Goldin says she also keeps a lot of her money close to home.

“I’ve also hired lots of people in this time of economic recession by renovating two bathrooms,” she said. “How’s that for an economist trying to lift up the entire economy all by herself?”

—Staff writer Noah S. Rayman can be reached at nrayman@fas.harvard.edu.

—Staff writer Elyssa A.L. Spitzer can be reached spitzer@fas.harvard.edu.