In Part 3 of blog contributor Ian Harvey’s three-part series, Charting a Course toward Impact, Ian covers strategies to make the most of donors’ investment in your organization. (Part 1 covered goal-setting and Part 2 covered prioritization)
Let’s imagine you have your goals and vision ready to present to potential donors. You have made your rounds and fundraising is going well. Congratulations!
As financial planners, we are often asked: “if I or my company/organization have $10,000 in cash, what should I buy to earn the highest return?” The answer is usually the ever annoying, “It depends”.
The first question you should ask yourself is: do you have enough resources available to ensure your next 12-18 months are covered? We call this an emergency fund when working with individual clients. Typically, with individuals the recommended reserve is 3-6 months. With a charitable organization, you may have commitments that your donors have financed and any loss in principal will result in missing your goals, not acceptable! Therein lies step 1) make sure you have enough resources to cover your short-term, foreseeable needs. Decide the amount and be sure you have those resources set aside. If you don’t, don’t invest. Manage your cash flow, keep your focus on the long-term goal/vision, fundraise with intention, and wait until you have sufficient reserves before investing.
For the funds that you will not need in the near-term, simply holding cash comes with its own style of risk, specifically, inflation. Since around 1927, inflation has been about 3%. Looking forward, the projections are closer to 2%. That means if you purchase a set of goods and services for $100 in 2019, those same goods and services would likely cost $102-$103 in 2020. In terms of your organization, if you can provide ‘X’ goods and services for ‘Y’ dollars in 2019, the cost in 2020 and beyond will be higher simply due to inflation. If you were to hold your reserves in cash over the next 10 or so years, the purchasing power (how much you can do with those dollars) decreases over time. For these longer-term dollars research based, well diversified, low cost investing is a great way to combat inflation.
When you reach the moment that your short-term obligations are covered, you are raising more than you need, and your goals are expanding, it may be time to invest a portion of your reserves. At this point, if you have not already, it will be a good idea to contact a CERTIFIED FINANCIAL PLANNERTM (CFP®). Financial planners will work to understand your goals, risk tolerance, and model the future so you can decide on a portfolio mix that is best for your organization. When the market experiences volatility (positive or negative), a financial planner will be there to ensure you make the right decisions.
What about the risk?
We must understand that investing comes with risk; inevitable and reliable risk. There will be short-term periods in which the portfolio returns are negative. The trick is 1) deciding to invest dollars you do not need in the short-term and 2) understanding that investing is a long-term game. The worst thing you could do for your organization, concerning investing, is to pick a portfolio with so much risk that when the market experiences a decline, you or your key members decide to sell and “wait for a recovery”. In all likelihood, you will wait until you are comfortable to re-enter the market. That comfortable moment typically comes when the market has rebounded and is “back in the black” at which point, you have missed what would have been your recovery. A financial planner will be helpful in striking the appropriate risk/reward balance of your portfolio.
Research based:
There is no reason to re-make history’s mistakes. Numerous studies are available about what makes a successful portfolio. You or your financial planner should heed this research as you are determining how to invest your organizations resources. Two areas of research that make an immediate impact revolve around diversification and cost of investing.
Diversification and Asset Allocation:
For the purposes of this piece Asset Allocation is defined as, the proportion of your portfolio dedicated to stocks, bonds, and cash. Stocks are higher risk (more volatile) investments and so have higher expected returns than their less-volatile counterparts, bonds and cash. You should select a stock/bond/cash mix that fits well with your organizations appetite for risk. One question you might ask yourself is; “how much can we, as an organization, ‘stomach’ during a market decline?” For rough math, you might consider a 50% drop in the global stock market. If you have a 50/50 portfolio of stocks and bonds, you might experience about a 25% drop in your portfolio. How does that feel? Can you still accomplish your goals? Is there enough time to ride out a downturn and participate in the upswing?
Before we continue, a note about stocks (diversifying the stock allocation):
Hindsight being 20/20, we are all drawn to the next Google or Apple. That said, few individual investors or investment managers could claim they invested their whole portfolio in early Amazon or Netflix stock. Even fewer can consistently select these “winning” companies year over year. Taken one-step further, if there were a manager who could consistently “win”, we would all invest with that manager, and we would be recommending them! Instead, focus on the long-term and select a well-balanced, diversified stock portfolio.
Low-cost:
This is straightforward: cost is the largest detractor of future performance. You should ensure the investments you select are as inexpensive as possible while still exposing you to the appropriate portfolio.
Finally yet importantly, if you make the decision to invest, it is important to set parameters for investment decisions going forward. You may write an Investment Policy Statement (IPS) to lay out the tenets by which you have agreed to invest the portfolio. Organizations (unlike individuals) experience turnover when it comes to decision-making powers. One day, you may have an investment committee, or the organization may have new leadership altogether. When that turnover occurs, an IPS can explain the reasoning for the current portfolio and provide guidelines for how to continue the investment plan. Investment Policy Statements can be changed/updated as needed but should be done within the by-laws or agreements of your organization.
If you have made it to the end of this piece, you may be a bit overwhelmed, and that is OK! Deciding to invest donor dollars is a big decision and should not be taken lightly. Be sure to review your current circumstances, be clear on where you are heading, and be sure you are making decisions aligned with your organization’s Mission, Values, and Goals. If possible, consult with a CFP® and again, your portfolio should be: research-based, diversified, and as inexpensive as possible.
Ian seized the opportunity to join Financial Asset Management Corporation in 2018, which allowed him to continue enhancing the services he could offer his own clients as well as become an integral part of growing the business processes and strategy for the firm.
Prior to joining FAM, Ian served as financial planning associate at Rockwood Wealth Management for three years before joining Sontag Advisory in 2015, where he was promoted to an advisory position. He earned his bachelor’s degree in Finance from Virginia Tech’s Pamplin School of Business in 2012 in their CERTIFIED FINANCIAL PLANNER (CFP®) Certification Education Track and went on to complete his CFP® certification in 2014.
Ian’s passion for financial planning extends beyond the work he does with his clients and right on through to advancing the future of the financial planning profession itself. He was co-founder of the Financial Planning Association’s (FPA) Student Chapter at Virginia Tech, which grew to be the largest student organization in the country in its first year. Post-graduation, Ian served as the Local Leader Liaison to FPA’s NexGen community and now serves as the community’s chair. Ian believes his volunteer work helping to advance the next generation of financial planners serves to the benefit of the future of the profession, and therefore, the clients they serve. It is this dedication to the profession and his clients that Investment News recognized Ian in their 2018 “40 under 40” list of financial advice industry leaders.
In his free time, Ian enjoys exploring New York City with his partner Emily - they especially enjoy classic cocktails in classic venues and all that is available under the sleepless lights of the city.
