Every college wants a big endowment. It can help cushion a school against financial insecurity and allow it to continue effective programs even in times when the economy isn’t doing well. The trouble is that the endowment might make a school too eager to take financial risks, too. According to an article yesterday posted on the Manhattan Institute’s blog:

The richer the institution, the harder the fall, generally speaking. Harvard, the nation’s wealthiest university, lost the most: nearly 30 percent. Yale, second wealthiest, lost.. almost 29 percent. The average loss was 18.7 percent. Not one of the nation’s five wealthiest universities, a group that included, besides Harvard and Yale, Stanford, Princeton, and the University of Texas System, bested that 18.7 percent figure (Princeton emerged at the top of the five, with its $13 billion endowment losing only 23 percent of its value in fiscal 2009, while Stanford lost nearly 27 percent and Texas nearly 25 percent).

All of these schools, while hurting in 2010, are still poised to thrive in the future. But with a few weird exceptions, however, it’s mostly the smaller, poorer schools that are doing well. This is because they made sensible investments. According to the article:

…Smaller colleges with lower endowments fared better than their super-rich cousins only—or at least mostly–because their endowments’ relatively modest sizes barred them from either participating in the riskier investments such as hedge funds and private equity funds and also kept those schools from hiring the kind of sophisticated endowment managers who gambled their way into disaster.

Smaller schools mostly put most of their money into low-risk, low-return securities. They were using their endowments to save for the future, not to try and generate more wealth.

This is a classic financial question, the higher education equivalent of put it under the mattress or invest in something risky. But these questions are no longer academic. As a result of risky investments, last year Harvard University was so short on cash it asked the state of Massachusetts to fast-track approval so the school could obtain an emergency $2.5 billion.

Disaster was averted, but maybe it’s time to learn from investment mistakes.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer