How Might You Invest Millions Today?

“OK. How would you like to have $1 MILLION dollars
and never pay taxes on it?

It’s easy. Here’s what you do. First, get $1 million dollars.

Then, when the tax folks come around and ask you why you didn’t pay taxes on those $1 million dollars, you simply say, ‘I forgot’.”

By Scott Welch, CIMA®, CEPA®, Chief Investment Officer & Partner

Reviewed by Carter Mecham, CMA®, IACCP®

The punchline of this joke – “I forgot” – is what many people of a certain age remember. But what we always thought was the funniest part of the joke was, “First, get $1 million dollars.”

Anyway, let’s play a game. Let’s assume you just got $10 million dollars (have to adjust for inflation from the original joke).

How should you invest it? Obviously, everyone has different objectives, risk tolerances, and cash flow needs. But let’s build a “blank sheet” portfolio that can then be customized to specific investor needs.

Let’s dive in.

Modifying the “Endowment Model” for Taxable Investors

From 1985 until his death in 2021, David Swenson was the Chief Investment Officer of the Yale University Endowment Fund. When he took over in 1985 the fund had $1.3 billion in AUM. By 2021 that had grown to more than $42 billion.

Along the way Swenson popularized what became known as the “Endowment Model” in managing institutional portfolios.

A bullet point summary of the Endowment Model is as follows:

1. Equity-Oriented Investing. It is well-known that, over reasonable time horizons, equities historically have outperformed other asset classes. With the theoretically infinite time horizon of an endowment fund, Swenson believed he could over-allocate to equities and correspondingly under-allocate to bonds and fixed income.
2. Global diversification across asset classes, risk factors, and public / private markets.
3. Heavy allocation to alternative investment strategies, both via hedge funds and private investments. Given the longer time horizon for institutional investors, they are better positioned to capture any illiquidity and leverage premiums associated with these types of strategies.
4. Disciplined rebalancing back to policy weights. Which can seem counter-intuitive since it might result in trimming outperforming allocations and buying into underperforming ones. But discipline is the key principle.
5. Use active management only in those asset classes believed to be least efficient.
6. Manager selection is critical, particularly in the less liquid asset strategies, where the difference between top and bottom quartile performing managers is markedly wider than in more efficient public markets.

We can see this last point illustrated in the now-common “manager performance dispersion chart,” which highlights the performance differential between top and bottom quartile managers, particularly in hedge funds and private investments.

Sources: Burgiss, Morningstar, MSCI, PivotalPath, J.P. Morgan Asset Management. All categories are global. Large Cap Equities and Bonds are based on the Morningstar Global Large Stock Blend and Global Bond (not hedged) categories, respectively. Core Real Estate is based on the MSCI Global Property Fund Index. Private Credit, Non-core Real Estate, Private Equity and Venture Capital are based on indices from the MSCI Private Capital Universe. Hedge Funds are based on the PivotalPath index. Manager dispersion is based on annual returns over the 10-year period indicated for: Large Cap Equities, Bonds and Hedge Funds. *Manager dispersion is based on annual returns over the 10-year period ending 4Q25 for Core Real Estate. Manager dispersion is based on the 10-year internal rate of return (IRR) ending 4Q25 for: Private Credit, Non-core Real Estate, Private Equity and Venture Capital. Past performance is not a reliable indicator of current and future results. JP Morgan “Guide to Alternatives.” Data are based on availability as of April 30, 2026.

The Endowment Model served Yale and other institutional investors very well for years, though it came under scrutiny during the Great Financial Crisis (GFC) when many institutions were forced to sell illiquid positions at a discount in order to meet funding requirements.

It has come under scrutiny again in the past few years as public equity markets have performed very well while many private equity investments have not met distribution expectations as the IPO and M&A markets have been fairly dormant.

Despite this periodic scrutiny we continue to believe the Endowment Model is a robust starting point for constructing an intelligent and resilient long-term portfolio.

When working with taxable individual investors or families, however, we need to make certain adjustments that reflect the differences between institutional and individual investors.

Specifically:

1. Individual investors pay taxes on their taxable accounts.
2. Most individual investors do not have an “infinite” time horizon and, in fact, frequently change behavior, risk tolerance, and investment objectives as market conditions change.
3. Most individual investors do not have the same tolerance for illiquidity as institutional investors.

So, what might the endowment model look like for taxable and very human individual investors?

We believe the answer is very similar to the institutional model with some important differences / nuances:

1. Equity-oriented investing.
2. Global diversification across public asset classes and risk factors.
3. A reasonable time horizon (5-10 years). This implies a strategic rather than a tactical approach to portfolio construction and management.
4. The intelligent allocation to both active and passive investment strategies, to optimize fees, taxes and performance.
5. A concerted effort to mitigate, manage, or defer taxes through intelligent financial planning, estate planning, and active tax management solutions (we suspect saying “I forgot” is not a long-term or successful strategy).
6. The prudent use of both alternative and private market investments – aligned with the investor’s liquidity and cash flow needs – to potentially achieve better diversification, higher cash flow, higher potential return, and more consistent portfolio performance over time. A more consistent portfolio performance can help to keep investors disciplined during periods of market disruption or economic downturns.

With this as a backdrop, let’s go about constructing our hypothetical $10 million portfolio.

Economic Regime Investing and Building “All Weather” Portfolios

The phrase “all-weather” refers to building portfolios that have the potential to generate consistent performance regardless of underlying economic and market conditions.

The simple schematic below illustrates the four primary phases of the economic cycle, based on whether the economy and inflation are increasing or decreasing.

We can then overlay this schematic with which types of investment strategies have the potential to perform best during which phase of the economic cycle.

Definitions: “Capital Growth” = Equity strategies, “Income” = Rate and Credit strategies, “Real Assets” = commodities, precious metals, real estate, MLPs, etc., “Volatility Management” = alternative and private investment strategies. For illustration purposes only – does not represent investment advice.

Since the economic regime is rarely static but generally is “flowing” from one state to another, this illustrates the potential benefits of diversifying across all the various investment strategies (i.e., the endowment model).

In other words, it is difficult to “outguess” the economic regime so it makes sense to build portfolios that can perform regardless of where we are at any given time.

Portfolio Construction Questions

In the public markets, a fundamental portfolio construction question is the use of active versus passive investment strategies.

For those investors who believe generating the market level return is acceptable and/or realistic, the use of passive strategies may be preferred, as it generally allows for tighter control over fees and taxes.

Other investors may want to deploy active strategies because they want to or believe they can “beat the market,” and are willing to accept higher fees and/or taxes to do so.

Neither approach is better than the other – it depends on client preferences. While our model portfolios are consistent in their allocations, we have versions that are largely passive, largely active, and a combination of the two.

If you accept that alternatives and privates have a place in diversified portfolios, the question then becomes, “How do I include them?”

In our opinion, private market strategies are straight-forward. Private equity is still equity, and private credit is still credit, and so should be funded accordingly.

With respect to diversifying strategies, some (long-short, hedged equity, market neutral, etc.) tend to have a higher correlation to the broader equity markets, and so should be funded out of the traditional equity allocation.

Others (global macro, managed futures, event-driven, etc.) tend to have a lower correlation to equities, and so should be funded out of the traditional fixed income allocation.

Access to these strategies depends on the nature of the investor. Many hedge funds and private investments are structured as limited partnerships (LPs) and are accessible to “Qualified Purchasers” or QPs, generally defined as HNW investors and families with $5 million or more in investable assets (not including a primary residence).

One potential advantage of the LP structure is that they typically have less constraints on the degree of leverage and illiquidity they can deploy and so have a better opportunity to take advantage of the historical performance premiums those characteristics have delivered.

Non-QP investors have access to other, more regulated strategies, including ETFs, mutual funds and other less liquid but still registered structures, such as Registered Investment Companies (RICs), interval funds or other semi-liquid “evergreen” structures.

These are viable strategies, but investors should be aware that regulatory constraints on illiquidity and leverage may dampen their potential return profile versus more traditional limited partnerships.

Putting it All Together

We now have a reasonable framework for building our $10 million portfolio, using the concepts of both the endowment model and economic regime investing.

$10 million is a great deal of money but it is not really enough to make meaningful allocations to every possible asset class – individual positions would be too small to “move the needle” in terms of performance.

So, based on our views on how to achieve a robust risk/return profile with adequate diversification, our “starting point” hypothetical portfolio might look like this:

Source: Certuity. This is a hypothetical portfolio used for illustration purposes only. It does not represent specific investment advice for any given investor.

How does this portfolio stack up against the investment tenets of the endowment model and economic regime investing?

1. Equity-oriented investing? Check. Our own historical analysis suggests that a starting portfolio that is 70%-75% equity versus the traditional 60/40 portfolio may accomplish several long-term objectives for most investors:
   • A higher expected return over time;
   • A lower risk of an investor outliving their money (which is cited as a primary fear of many investors); and
   • A higher terminal amount that provides a better cushion for meeting legacy or philanthropic goals after the investor passes away.
   • The trade-off is – at least historically – a slightly higher standard deviation within the portfolio. That is, short-term volatility, but remember that these portfolios are constructed to deliver results over longer time horizons.
2. Global diversification across asset classes, risk factors, and public private markets? Check. The risk factor diversification would need to come at the portfolio construction and strategy implementation level versus the allocation level, but otherwise this portfolio achieves our objective.
3. A reasonable time horizon (5-10 years). This implies a strategic rather than a tactical approach to portfolio construction and management. Check.
4. The intelligent allocation to both active and passive investment strategies, to optimize fees and taxes. Check, though again this would come at the portfolio construction and strategy implementation level versus the asset allocation level.
5. A concerted effort to mitigate, manage, or defer taxes through intelligent asset location, estate planning, and active tax management solutions. Check, though this would come as part of the broader financial planning and ongoing portfolio managements levels. But there is nothing about this portfolio that does not lend itself to planning and ongoing tax management.
6. The prudent use of both alternative and private market investments – aligned with the investor’s liquidity and cash flow needs – to potentially achieve better diversification, higher cash flow, higher potential return, and more consistent portfolio performance over time. Check. In our base case we assumed a 25% allocation to less liquid strategies (10% to diversifying strategies and 15% to private investments), which we believe is a reasonable level of relative illiquidity to begin the discussion with. This level can be dialed up or down depending on individual objectives, risk tolerance, and liquidity needs.

When we discuss portfolio construction with new and existing clients, there is no obligation to invest in less liquid strategies – this sample portfolio simply represents our initial “best thinking.”

But another feature of this portfolio is that it can easily be adjusted to remove any illiquid investments and simply reallocate into an all-liquid portfolio that still meets most of the objectives of our endowment model approach.

Summary and Interpretation

All individual investors and families are unique with respect to their objectives, cash flow needs, long-term goals, risk tolerance, and tax sensitivity.

That said, while all investors are unique, in broad strokes most want the same three things:

• They want to maintain or improve their current lifestyle;
• They want to make sure they don’t outlive their money and can meet their legacy and philanthropic goals; and
• They would like to minimize taxes along the way.

Different investors will put different weights on each of these objectives, but keeping these objectives in mind can help frame the planning and discovery phase when meeting with clients.

Planning should always come first in any wealth management relationship, especially the identification of objectives, risk tolerance, and cash flow needs. The portfolio construction discussion then naturally follows.

There is no “one size fits all” portfolio. But we believe it is helpful to start from a framework that clearly lays out an underlying investment philosophy and portfolio construction approach.

As always, we welcome your questions and feedback.