The Forever Portfolio

In its first half-century the Nobel Foundation had a rough go of it. Its assets shriveled. The value of the five famous prizes it funds shrank by 69%. And then the outfit began a ­remarkable resurgence that has brought the awards to $1.5 million apiece—in purchasing power that’s ahead of where they started.

In that decline and recovery lie some powerful lessons for investors who need to make their savings last: Bonds are dangerous, taxes are deadly, your spendable yield is low and your portfolio’s survival may hang on diversification well away from your homeland.

Alfred Bernhard Nobel was an ­inventor who made a tidy fortune in dynamite and other chemicals. When he died at 63 in 1896, the childless bachelor left behind a hand-scrawled will leaving most of his estate to a new foundation that would reward scientific and cultural achievement. It took five years for the legal and ­operational battles over this murky document to be resolved.

The foundation opened for business in 1901 with awards (to X-ray man Wilhelm Röntgen, among others) worth $1.2 million in today’s money. And then things went downhill. One problem was that an expected tax exemption did not come through; for a long while the foundation was Stockholm’s largest single taxpayer. The other was Alfred Nobel’s instruction that his money be invested in “safe securities.”

What does “safe” mean? It was presumed that the endowment should buy mortgages and bonds, explains Lars Heikensten, the former head of Sweden’s central bank who took over management of the foundation last year. Fixed-income assets, though, proved to be anything but safe during the last century’s bouts of inflation. Measured in Swedish kronor, the prizes dipped only a little. Measured in spending power, they collapsed.

The Nobel Foundation saved itself by getting the rules changed. It won a tax exemption in 1946 and seven years later permission to invest in stocks and real estate. The 1982–99 bull market, a well-timed fling in Stockholm real estate, and caution in advancing the prize values combined to restore the endowment. It’s now worth $430 million—not quite double, in real terms, the sum that Nobel left behind.

What should an individual investor get out of this story?

Spend sparingly. The foundation is drawing down 4% of its assets annually to cover the prizes and the costs of the selection committees and the awards ceremony. Heikensten says that level of spending is not sustainable. He is determined to get the number closer to 3%, by getting ­corporate sponsors, for example, to pick up some of the ancillary expenses.

A rule of thumb in financial planning is that retirees can spend 4% of their assets annually. That works for a 70-year-old. It doesn’t for someone who retires at 55 and has a younger spouse.

Go light on bonds. The Nobel Foundation has only 23% of its money in cash and fixed-income investments. The rest is in stocks, real estate, private equity and hedge funds.

Are you, like Alfred Nobel, partial to “safe” government bonds? Real returns are meager and likely to remain so for years, predicts Heikensten.

You might be dazzled by long Treasurys’ 34% total return last year, occasioned by a drop in ­interest rates. That number means ­nothing. This is what matters: If you own one of those bonds now, you are destined to get only 2.9% a year over its remaining life. Now ­subtract inflation, for which a 2% expectation is rather ­optimistic. You are left with 0.9% to spend.

Don’t want to take a chance on ­inflation? Buy an inflation-protected Treasury. Now you are assured of getting a rotten return: 0.6% a year over 30 years or –0.3% over 10.

Stocks are scary, particularly given the uncertain economic recovery. But it is quite possible for stocks to do well when economies are not doing well, says Kent Janér, a Stockholm money manager who sits on a Nobel advisory committee. It comes down to whether stocks are reasonably cheap—whether, that is, they price in the unpleasantness in Europe and elsewhere. Janér thinks they do. You just have to be prepared to weather the next bear market.

Watch your tax bill. The Nobel Foundation lobbied for the exemption that saved it. What can a private investor do? Two things.

The first is to maximize the sums stuffed into tax-deferred accounts, ­including both 401(k)s and IRAs. (Mitt Romney has been particularly adept at this strategy.)

The other is to minimize the income from any assets held outside those shelters. That means selling losers but not winners, holding stocks that provide appreciation rather than dividends, and holding tax-favored assets like real estate and master ­limited partnerships.

Cut your costs. The Nobel Foundation is paying 0.6% of assets annually for money management. Heikensten hopes to get that number lower by using the foundation’s prestige to win fee concessions.

Small investors can’t cut deals, but they can put a large portion of their money in index funds that cost 0.1%.

Cast a wide net. Only 38% of Nobel’s money is invested in Sweden. To be sure, a 62% foreign allocation would be high for an American, whose home market is larger. Still, most investors are too chauvinistic.

It is easy for either a Swede or an American to get complacent, warns Janér. Neither country has lost a war in the last century or experienced a bear market quite like Japan’s. Better include some other continents in your mix, he says.

After all, you don’t know what the next century is going to look like.