As the market swoons over drooping earnings and high energy prices, it may be time to return to school for some solid investment guidance. Harvard would be a good place to start.

I’m not talking about plopping down $40,000-plus to step inside the famed classrooms in Cambridge, Mass., though. You can learn a great deal by studying how the university’s money managers invest their $27 billion in total funds, the largest portfolio among American colleges.

How would your “Crimson” plan work? First, focus on cost and diversification, finding the widest exposure to several investments at the lowest possible cost. That typically means avoiding most broker-sold products and embracing index mutual funds and exchange traded funds (ETF).

While I don’t want to play spoilsport, one of the first ground rules in emulating the Crimson plan is to not expect a 21% total return every year, which was Harvard’s performance in fiscal 2004. It also doesn’t hurt if you can pay your team of top financial advisers $78 million.

Harvard’s investment strategy aside, cutting expenses should be the first lesson, as management and trading costs needlessly devour billions of dollars of assets every year.

The Zero Alpha Group, a financial planning group, found in a 2004 study of 5,000 stock mutual funds that investors were paying about $17.3 billion in hidden mutual fund expenses.

Fortunately, the three major mutual fund groups – Fidelity Investments, the Vanguard Group, and Capital Group – are engaged in a price war. The firms have lowered their management expenses over the last year. The iShares family of ETFs is also worth considering in this pro-investor skirmish.

Although you can’t control internal expenses that involve trading – what money managers bill you to buy and sell securities – you can switch into funds that control these costs.

Typically, trading expenses are buried in turnover or how much a fund manager buys and sells securities every year. A turnover of 100%, for example, means a manager replaced an entire portfolio in a year. Actively traded funds have higher trading costs than passively managed funds.

The Zero Alpha study found that the “total trading costs of active funds was 0.48% per year. The trading costs of index funds was 0.064% annually.”

“The funds with the highest turnover tend to have the highest hidden costs,” said Kimberly Sterling, a certified financial planner with the Resource Consulting Group in Orlando, Fla., an investment firm that co-sponsored the Zero study.

Lower your costs by using index or ETFs, which rarely trade securities. There’s a stark difference between what you would pay in trading expenses for an index vehicle (0.20% or less) versus a fund that is actively managed.

Expenses and trading costs are the real low-hanging fruit that can juice up your returns overnight – if you can lower them by changing funds.

Say you are paying an average of 1% a year for expenses and you have $500,000 saved up in your retirement plan, earning 8% annually. Switch to all index funds or ETFs with annual expenses averaging 0.20% and you will have almost $333,000 more after 20 years. That’s the equivalent of two Ivy League undergraduate degrees in today’s dollars.

Do the math yourself by plugging in expense numbers from your holdings into the mutual fund cost calculator at http://www.sec.gov/investor/tools/mfcc/mfcc-int.htm.

Meanwhile, back in Cambridge, examining Harvard’s allocation, or investment mix, provides a case study in how diversification works. It’s a far cry from the conventional wisdom of 60% stocks, 40% bond recommendation for conservative investors.

Here’s a sampling of Harvard’s allocation from its fiscal 2004 management company annual report (Harvard only publicly reports performance once a year and would not release recent return figures or comment for this article):

* American stocks only comprised about 19% of the Harvard portfolio in 2004, according to the annual report of the Harvard Management Company. If you have a large position in American blue chips or sin gle positions in these companies, consider shifting some funds out of domestic stocks.

* Non-American stocks and emerging markets (growing, industrialized countries),accounted for more than 20% of the portfolio.

* Bonds, which include U.S., high yield, foreign, and inflation-indexed bonds, were about 16% of the portfolio.

* Absolute return (hedge funds), real estate and commodities represented about 29% of the holdings.

* The remainder of the portfolio consisted of private equities (non-publicly traded securities), high-yield securities, and cash.

It makes sense to diversify broadly because your portfolio will automatically find pockets of growth no matter what the general market is doing.

You can best imitate most of the American stock market by owning the DJ-Wilshire 5000 Index, which samples the returns of more than 6,000 American stocks.

For non-American emerging stocks, the Vanguard Emerging Markets Stock Fund is a good proxy. For even broader foreign exposure, consider the Vanguard International Stock Index Fund.

The iShares Lehman Aggregate Bond Fund will cover most U.S. bonds. The American Century International Bond Fund is a good representative of foreign bonds (which I hold in my retirement plan).

Far too many investors ignore the virtues of commodities and commercial real estate, which reward you when inflation or commodity prices surge.

Commercial real estate can be represented by the Vanguard Real Estate Index. Commodities and inflation-protected securities are found in one fund, the Pimco Commodity RealReturn Strategy Fund (my retirement fund’s inflation hedge in addition to the Vanguard REIT fund).

The Crimson program works best if you educate yourself about the risk and return profile of different types of investments and how they perform in varying market conditions.

Be wary and stay clear of investments you may not fully understand. It will be almost impossible to pick a consistent hedge fund or private securities without a top-notch adviser willing to do the research. For that, you just may need a Harvard type, and a skeptical one at that.