invest

  • Your Foundation’s Long-Term Investment Success Tied to Your Risk Management

    Many elements affect the success of your endowment over the short term. Quality governance, leadership, and fundraising are among the most obvious. However, when looking at your endowment growth over longer periods of time, what counts is how it fares during downturns that regularly hit the financial markets.  

    It is no surprise that healthy financial markets put the wind at the back of your endowment sails. Advancing stock markets drive your endowment asset levels higher, and usually prompt increased donation flows — a perfect combination for success. In fact, during most bull markets the average foundation results are quite similar. It appears that the rising tide does, in fact, lift all ships in the endowment world. 

    Fortunately, most sophisticated endowments usually have 60-70% of their assets invested in the stock market during most of, if not all of the time. When one considers that the average bull market lasts 7-9 years and has returned investors 200%+ during most of those periods, it is easy to see why the average endowment enjoys success when the good times roll. 

    But it also appears that most endowments lose in a similar fashion when the proverbial “music stops.“ In fact, during market declines similar to 2008-2012, the majority of endowments lost significant value, in some cases as much as 50%. As the stock market tide pulls back, most endowment ships take on water! 

    Such market swings create more havoc than you may think. The negative impact of substantial stock market declines has a profound effect on the health and even the longevity of your endowment assets. This is mainly due to what we call the “ugly math” of big investment losses. 

    A 50% decline in the value of your endowment requires a 100% upward swing in the market to just get back to where you were.  (Think of it: if $100 loses 50%, down to $50, it takes a 100% gain to recoup to $100.) And this ugly math is compounded by your need to continue making withdrawals from your endowment, thus further depleting your principal during a down stock market cycle. On average it takes 6-7 years for stock markets to fully recover bear market losses.

    The moral of the story is this: you need appropriate risk management tools that prevent substantial losses and ugly math.

    No one can predict with accuracy when the next bear market will ravage stock markets, but committees can prepare for their inevitable arrival by having a few important policies and using certain tools. Here is a breakdown of four things you can do: 

    1. First, you need a finance committee who is not tricked by their own human nature or lack of knowledge when it comes to market history. Often committees can be prompted by current stock market strength to become overconfident about future stock market advances. They let the endowment remain inappropriately over-weighted in stocks – at just the wrong time.  This type of behavior is why the human brain isn’t great at investing and is one of the reasons that a strict, well-written Investment Policy Statement should be in place and adhered to.  
    2. Related to this, be sure your Investment Policy Statement specifies your endowment’s maximum stock exposure—and then adhere to it.  This policy should allow the investment manager to be significantly less exposed to stocks in bad markets – which I call “active asset allocation.”   
    3. Use “sector management,” by which I mean pay attention to the individual stock market sectors, which move differently.  There are periods of time when certain sectors of the stock market experience above-average growth to a point of dangerous valuation, followed by a crash. Tech stocks in 1999 (which later crashed) are a good example. Committees and investment managers should review their investment portfolios for those areas that have become significantly overvalued and reduce exposure to avoid catastrophic declines in those sectors. 
    4. Lastly, if you follow my advice and only invest in individual securities (individual stocks and bonds from around the globe), be sure to use “stop loss orders” which help prevent a huge loss in any one investment, sector or the whole portfolio. Stop loss orders automatically sell a stock if it declines by a certain specified amount, thus keeping your endowment away from catastrophic loss.

    No one knows when the next bear market will occur – but given how long it has been since the last, many smart forecasters think sooner than later. If there were ever a good time to get serious about risk management, the time is now by following these recommendations. Let’s make sure that when the next bear market is at your doorstep, you are prepared to weather the storm and make your foundation sustainable for many lifetimes!


    The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.

    This book walks you through the basics and best practices of what you need to know to be successful.

    Order your copy today on Amazon



  • Global Stocks Rally Off Lowest Levels: Is It Safe to be Fully Invested?

    Over the past six weeks, global stocks have staged a significant comeback. After being down nearly twenty percent in late December (bear market territory), indexes have climbed half-way back to their previous highs (see chart below). Much of this recent gain can be attributed to the Federal Reserve being more sensitive to what is now obvious: the global economy has been decelerating along with corporate profits, neither good for stock prices.

    In addition to the Fed’s accommodation, there is swirling speculation (mostly optimistic) that another US government shutdown and harmful trade negotiation outcome can be averted. I have taken a more defensive position during the past few months – which can be trying given the most recent upward trending market. Is the recent market strength a sign that “all is well” and we should be once again fully invested (up to your asset allocation)? Or is the recent strength just a temporary “relief” rally to be followed by a decline?  Let’s look at some data points.

    MSCI World Stock Index (1 year)

    Short Term Trends and Fiduciary Responsibility
    Although the recent market strength is welcome, investors should be careful about assuming that short term price movements dictate the health of the underlying economy and corporate profits. Short term (weeks) movements in stock prices should also not be used to predict the health or future direction of stocks, as tempting as it may be.  For instance, a decline in stocks during a bull market can appear to lead one to consider selling, just as a temporary rise in stocks in an unhealthy market can lead one to go “all in” – both bad ideas.

    In my view, investors would be best served by confirming that the basic fundamentals of a healthy economy and stock market justify being fully invested in the stock market.

    The Slowing Economy and Profits Picture
    If the global economy can slow down to a consistent “cruising speed” of 2% annually and the Fed stays accommodative, we believe that – with corrections along the way – stocks can go higher this year.

    However, at this point, the downtrend in economic growth and earnings has not shown signs of slowing.  Today, for instance, the big industrial company Caterpillar warned of weaker than expected sales. In my view, a continuation of weaker than expected economic statistics and profits can easily send markets lower and your first priority for your assets is to mitigate significant downside risk.  I will be watching all the data points in the coming days and weeks for signs of stability.

    Trade, D.C., Brexit, etc.
    Each of these factors played a role in the market’s decline and subsequent recent market strength – depending on nothing but short term speculation. Investors would be wise to consider the potential negative impact that these events could have on the health of the economy. I will also be watching these data points over the course of the coming days and weeks.

    Is Recent Market Strength Sustainable? Is a Market Correction Overdue?
    In a bull or bear market, stock indexes have periods of short term strength (rallies) and weakness (corrections). Interestingly the recent strength in stocks has not been accompanied by any clarity on the issues discussed above, except for positive Federal Reserve commentary. The strength, however, has been significant and has reached a point by many measures I consider to be overextended. So yes, a correction or decline in stock prices is probably overdue at this point.

    Should You Buy Shares in Great Companies During the Next Market Correction?
    If the economy and profits appear to be on better footing and trade and government shutdown risks dissipate, the answer is YES. A moderate stock market correction, with better fundamentals, would remove recent underperformance and allow you to buy some of the world’s best companies at great prices. On the other hand, in the face of continued deterioration in market fundamentals, continue the tact of keeping “safer than sorry.”

    A Profitable 2019
    It is important to recall those periods of tough economic climate and bad markets are not long affairs (months not years). In my view the stock market will soon – if it already hasn’t done so – discount the worst-case scenario for the economy and corporate profits, leaving you plenty of time to make great strides in growing your wealth during the course of the year ahead and the many years beyond.




    The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.

    This book walks you through the basics and best practices of what you need to know to be successful.

    Order your copy today on Amazon