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James Demmert Interview with Marin Magazine
BY KIRSTEN JONES NEFF • PHOTO BY LENNY GONZALEZ
ACCORDING TO THE San Rafael–based Center for Volunteer and Nonprofit Leadership, Marin County is home to 1,543 nonprofits contributing approximately $950 million to the economy and donating the time of 115,000 volunteers to those in need. Still, even though Marin is one of the most affluent counties in the country, the Great Recession of 2008 left one-third of Marin County nonprofits running a deficit, with many still struggling to recover five years later, according to a 2013 CVNL report — over one-quarter of local nonprofits surveyed reported that they did not have a reserve. Small and midsize nonprofits are the most vulnerable of organizations during a recession, struggling to stay afloat right when services are needed most.
Now, with whispers of another looming recession swirling, nonprofits and individuals are getting pre-pared. Thirty-year veteran financial adviser and Tiburon resident James Demmert specializes in working with nonprofits and is founder and managing partner of Main Street Research investment advisers in Sausalito. He recently published his second book, The Sustainable Endowment, offering investment strategies for nonprofit endowments, and the Tiburon Peninsula Chamber of Commerce named him 2018–19 Citizen of the Year, citing his firm’s philanthropy and his personal dedication to the community. We asked him to comment more about the financial landscape of nonprofits and foundations.
What is the most important thing a nonprofit or foundation can take from your book?
New generations don’t remember that in 2008 [many] people lost 50 percent of their wealth. There are a couple chapters about how foundations can mitigate the risk of catastrophic decline. It reminds people that markets go in cycles and every seven or eight years you get horrendous declines. That’s one thing if you’re an individual — not a good thing, of course — but if you’re a foundation and your assets fall 30, 40, 50 percent, a few things go wrong: one, you can’t give as much money away; two, your donors get really upset and typically stop donating; and three, if your value falls and you are still sending money out, your recovery time takes twice as long because your asset base is being nicked away as you try to recover. There is a cataclysmic amount of bad stuff that happens. I call this the “ugly math” of catastrophic decline. But there are tools you can use to mitigate loss.
What types of alternative investments do you suggest for nonprofits and foundations when the stock market is volatile?
Given the potential downside risk in stocks historically, foundations and nonprofits should avoid being in 100 percent stocks at any time. Alternatives such as bonds and real estate investment trusts, as well as defensive stocks (less vulnerable to economic downturns) such as utilities, can protect the assets from being fully exposed to the stock market, while generating positive rates of return. Foundations and nonprofits, like with family wealth, should determine their required rate of return and invest accordingly. This rate of return should be a result of determining annual expenses and withdrawals and the effect of inflation over time.
Do you have any specific recommendations for an election year?
Historically, election years are positive for stock market returns. However, investors should be careful to not have expectations based on that statistic alone. In our view, the upcoming election year should be viewed through the lens of what’s happening with the global economy and policy makers. The global economy has slowed quite a bit over the last 18 months and many investors and the media fear a recession is in the offing — recessions bring about the worst in stock markets: think 2008 (with minus 50 percent losses). However, our research suggests the odds of a recession are quite low over the next 12 months. Keep in mind that stocks today are pretty much at the same level they were 18 months ago, which reflects quite a bit of the recent slowdown in the economy and corporate profits. Fed policy and the potential for a mitigation of the tariff war may make stocks the winner in 2020, particularly companies that can deliver consistent growth, such as technology, health care and consumer staples. We would be wary of long-term bonds as interest rates may rise at some point in the coming election year, and we favor real estate investment trusts with a focus on health care, technology and storage.
By law, foundations are only required to give away 5 percent of their wealth. What is the justification for this low percentage?
Though the 5 percent figure may sound low, we think it is a practical number based on historic financial market returns and [the task of] managing these funds in a prudent manner. Foundations and nonprofits have a fiduciary duty to protect these assets while pursuing risk to grow the assets. We [advisers] also have a similar fiduciary duty. If you consider that the long-term annual return of stocks is approximately 9 percent, the 5 percent withdraw rate, plus annual administrative expenses and inflation, is attainable without taking undue risk. One of the biggest mistakes we have seen over the past 30 years is a result of endowments or families taking undue risk — particularly having too much stock exposure at the wrong time. All investors should take risk management more seriously to avoid getting hurt in the next inevitable, and highly unpredictable, big drop in stock markets. We do this for foundations and families by being flexible about the allocation to stock exposure, using alternatives such as bonds, and employing risk management tools such as stop-loss orders. Stop-loss orders automatically sell securities before declines become catastrophic. By employing these kinds of risk management strategies and tools, investors can be prepared for unexpected and significant risk and sleep well at night.
As someone who works closely with our local nonprofits, how would you say Marinites are doing in terms of giving?
I feel like we can do better. We have pockets of underserved areas — like Marin City — that need more attention. People may give back more here in Marin than in other places, but it’s still not enough. The older generation gives back more. I would like to see younger generations give more. There are some parts of Marin where people are maybe too obsessed with what they have and are unwilling to give back. We always try to inspire families who are clients of ours to give back. Try to create a culture and a process of giving back to the community, and you gain the satisfaction of being good community members. We are doing OK, but I think we can do better.
How did you become a financial adviser?
I am from upstate New York. I was lucky, my parents sent me to boarding school even though they could barely afford it, and that got me into a better college. I went to Harvard and when I was there as an economics major, math minor, I decided to do an internship. This was 1985, when internships were unusual, but I chose to do it at an investment firm called L.F. Rothschild. That was a life-changing moment. That got me inspired and I worked there for two and a half years while I was still in school. When I got out of college, I already had my licenses, so it was a great head start.
What brought you to the West Coast?
It was 1987 when I graduated from college, the year the movie Wall Street was popular. All of my graduating class was going to New York and I said, “I’m going to do something different.” My parents brought me to San Francisco when I was 14 and I thought, “This is so beautiful. When I have my own thing, I’m going to San Francisco.” I arrived here with just a suitcase.
To read this article in its entirety, please click the following link: https://www.marinmagazine.com/financial-advisor-james-demmert-on-nonprofits-in-marin/
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Oct 17 2019 
The Importance of the Sustainable Endowment
Nonprofit organizations and foundations have played a pivotal role in American culture for nearly a century. As a third sector next to corporations and government, they provide many types of programs and services to support the public that the other two sectors do not or cannot provide.
The National Center for Charitable Statistics (NCCS) estimates that there are more than 1.5 million nonprofit organizations registered in the United States. These include public charities, private foundations, and other types of organizations. Nonprofits and foundations are also found throughout the world, but our concern in this book is solely those operating in the US under specific American tax laws and financial regulations.
Nonprofits participate in a wide range of fields, including health, educa- tion, literacy, poverty reduction, social justice, religion, disaster relief, support for the arts, and more. They have been responsible for significant advances in the health field, such as eliminating hookworm and yellow fever in many countries, disseminating polio vaccines to the far reaches of the world, and virtually ridding humanity of smallpox. They have played a strong role in educating people about and treating HIV/AIDS.
Nonprofits help fund theatrical and artistic productions, museums, cultural attractions for the public, and student scholarships for higher education. There is no doubt that nonprofits and foundations are a vital element in society that must continue contributing wherever they are needed.
The Sustainable Endowment is my contribution to helping nonprofits and foundations learn how to be effective, well-managed, and sustainable. It is intended for executives and board members involved in the management of nonprofits, public charities, or private foundations operating in the United States. For our purposes, I do not make a distinction between these terms; all are organizations following the same basic ground rules when it comes to adhering to regulations to maintain Section 501(c)(3) tax-exempt status.
For clarity, let’s note that “nonprofit” is an overarching term for many types of non-governmental corporations or organizations that do not seek to make a profit from their activities and are exempt from federal income taxes under IRS Section 501(c)(3). Instead, they use their financial resources to benefit a mission of some kind.
There are roughly 29 sub-classes of nonprofits. One of these is a public charity, which collects donations from the general public to support a public cause, such as safety, disaster relief, assistance to the poor anywhere in the world, animal rights, and so on. A private foundation, often funded by a single individual or business, is equally dedi- cated to a cause or mission. Private foundations may donate to charities or may hand out monetary grants to individuals who seek to accomplish a goal on behalf of the foundation. Churches, religious organizations, educational institutions, and several other types of organizations may also be tax-exempt nonprofits.
In my book, I will use the terms nonprofit and foundation interchangeably without distinction, as my goal is to help all types of nonprofit organizations that desire to improve their executive management, especially regard- ing their financial health. I will discuss the principles central to becoming a well-run nonprofit that understands how to manage its finances. Whether the nonprofit raises funds from public donors or is a foundation funded by a single source, the management of its investments plays an important role in its year-to-year success as well as its long-term sustainability.
ORGANIZATION OF THE PRINCIPLES
Discussing the financial management of a nonprofit encompasses many issues beyond the basics of investing. That is why this book is organized around 10 principles, beginning with three chapters covering the critical basics of foundation management.
Following those three principles, the remaining seven will explain the specifics of how to go about the financial management of your endowment, especially in regard to investing the principal to maximize returns while minimizing risks. I do not delve into issues regarding a nonprofit’s fundraising efforts or operating budgets — those are your decisions.
My goal is strictly to educate foundation leaders and investment committee members on the best practices for investing an endowment to maintain stability or to grow it over time with the least amount of risk. Executives at nonprofits and foundations, especially those on investment committees, come from a wide range of backgrounds. You may or may not be familiar with the investment concepts and principles that I present in my book, so please excuse the caution I have taken to ensure that I thoroughly explain basic terminology and the fundamentals of investing. I want to be sure all readers are comfortable with its contents.
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.
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Oct 17 2019 
Environmental, Social & Governance (ESG) Awareness
ESG Investing Adds Value on Many Levels
In recent years there has been an increased awareness regarding public companies and their ESG track record. In my own work, I have also been witness to this trend. I often hear CEOs and research partners weighing in on enhancing their corporate culture as it relates to issues of governance, society and sustainability. Moreover, there is a growing movement of “smart money” investing in companies that have a strong history of these pertinent issues and I see this as something that adds value for shareholders. Over the years, I have included ESG components in my company’s research process to avoid investing in companies that have flagrantly poor environmental, social and governance track records.
Investing in companies that cultivate ESG best practices just makes good investing sense. In the “old days” one might argue that to invest with a social conscious might mitigate performance – but today that is just not so. There are an increasing number of large institutional investors who appreciate companies with high ESG marks and their hefty investment dollars can go a long way in supporting both higher stock prices and industry standards.
For many, investing with a social conscious is a challenge since most mutual funds – especially the index funds – invest in a wide array of companies without regard or ability to be ESG sensitive. This invariably exposes investors to companies that may have egregious violations, which hurts these index shareholders in the long run.
ESG investing means different things to different people. Searching for companies with certain characteristics that show the promise of accelerated growth – with a bias towards those with positive governance, environmental and social awareness, is how I look at it. However, you may feel that you would like your portfolio to be more sensitive to specific ESG constraints. Do what works for you.
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
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Sep 11 2019 
Are Investment Fees Draining Your Foundation’s Endowment?
The success or failure of an endowment relies on many interrelated and important factors. Some of these factors are impossible to control or predict such as the level of next year’s donations? Or the return of the endowments investment portfolio in the years ahead?
However, foundations should strive to do their best in areas where they can take control and make a difference. An area we often see ignored or misunderstood by nonprofits and foundations is the cost of investment management. A keen eye on these costs can enhance significantly enhance long-term performance.
In our opinion, most investors both institutional and individual pay too much for investment management. When one considers that most endowments strive to distribute 5% of the value of their asset base annually but also incur 1% in administrative expenses, any additional “above normal” expenses for investment management puts pressure on the endowment to take risks that may not be otherwise necessary.
For example, we often see foundations that have hired an outside manager or “consultant” who charges an annual fee, which is normal but then puts the foundation assets in investments that charge additional annual fees. These include mutual funds, exchange-traded funds, or even investments that have to compensate other outside managers.
This layering of fees may not look like much by decimal points or in any given year, but they add up over time and can significantly reduce the endowment’s long-term returns.
For example, consider a foundation that distributes 5% annually in grants, incurs 1% in administrative fees and pays 1.8% annually for investment management (we’ve seen higher fees!). Combined, this adds up to close to 8% flowing out of the endowment annually. The investment manager is almost 25% of the total annual outlay!
Of course, there may be investment managers somewhere in the world who may deserve such a high fee due to their spectacular results. But the fact is, on average, this is not the case. Indeed, given that the average endowment usually has a maximum of 60 to 70% stock exposure at any given time and the historical returns on a 60/40% stock/bond mix over the last 50 years has been a mere 6%, paying a high investment management fee might reduce your effective return to 4% or less.
For foundations and endowments, doing and understanding this math is essential to your long-term survival!
To avoid these fee pitfalls, foundations and nonprofits need to ensure that their investment management costs are competitive based on their endowment’s size. Most importantly, they need to avoid the layered fee arrangements that so often exist and go unnoticed – until it’s too late. Keeping an eye on the costs you can control will put your organization in better shape to remain 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.
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Sep 03 2019 
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:
- 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.
- 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.”
- 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.
- 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
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Aug 13 2019 
Spending & Investment Policy Statements
Keys to a Sustainable Endowment
The management of nonprofit or foundation assets can be a challenge. These are unlike managing family wealth due to the need for endowment longevity and the regular withdrawals usually made.
Ideally, a foundation’s assets should grow beyond many lifetimes and allow for distributions of approximately 5% annually for most nonprofits. If the world could depend on financial markets consistently delivering returns in excess of 5%, or your donations exceeded this figure each year, managing these important assets would be quite simple. However, financial market returns are seldom consistent and can sometimes deliver losses rather than gains. Furthermore, in periods of financial market declines, your donations often decline or disappear altogether as donors tighten their own pocketbooks.
So how does a foundation attempt to bring consistency to the challenge of growing your assets, making annual withdrawals, and creating a sustainable endowment?
The first step to meet the challenges of managing endowment assets lies in having a well-conceived, written Investment & Spending Policy Statements. These documents serve as the rulebook for your finance committee. They should be packed with all the details about how the foundation’s assets will be managed. These policies should be written to assist the finance committee and board not only in your quest for asset appreciation but managing risk.
A well-written and defined Spending Policy will include the goals of the foundation, the purpose of grants you make, and a statement of your long-term targets for grant spending. The policy should also include formulas to be pursued to “smooth out” your annual distributions based on recent year’s investment returns as opposed to using an absolute or fixed grant withdrawal rate that may have no connection to the growth or decline of your endowments assets.
For example, by using a moving average of recent annual returns, foundations can reduce the risk of overspending in any given year. Once the spending policy is established it should be reviewed and updated at least annually.
The Investment Policy Statement is a document that assists the finance committee in meeting the spending policy guidelines while managing investment risk – key issues for fiduciaries. All too often foundations and non-profits run afoul in their management of risk. A well-written Investment Policy will instruct the committee on the guidelines to be followed to avoid taking on too much risk. At the same time, the Policy needs to spell out the upper limits of investment risk to meet long-term objectives. Too little risk can often result in below-average returns that equally limit your goals. Risks need to be balanced.
The Investment Policy document will also define the goals of the foundation and all of the important factors that affect the investment of the assets. This will identify the foundation’s risk profile and growth targets, the types of investments allowable, the investment manager selection, guidelines for asset allocation ranges, and risk management strategies to prevent catastrophic loss.
In recent years, many foundations and non-profits have also added into their Investment Policy statements of environmental, social and governance (ESG) constraints. When completed, your Investment Policy thus serves as an important guide to reduce and manage risk, meet performance objectives, and fulfill the committee’s fiduciary duty.
Today, more than ever, there are significant risks in global financial markets – many that we may know about, but more which we are unaware of. Though no one can predict with accuracy the outcome of future market returns or risk, a well-written Spending & Investment Policy Statements will help your nonprofit’s finance committee to manage its way through up and down market periods and ultimately create a long-surviving, sustainable endowment.
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.
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Jul 22 2019 
Creating Your Nonprofit’s Investment Committee
Foundations and non-profits are busy organizations with a myriad of tasks and goals. Often these organizations are filled with smart individuals with specific talents and backgrounds that make them ideal for the job at hand.
However, not all foundation board members or employees are actually well-suited for overseeing the management of the organization’s finances and investments. The importance of overseeing your assets cannot be overlooked. Your endowment is a key driver of your nonprofit’s survivability and future growth.
So, how can foundations and non-profits create a responsible investment committee to ensure a sustainable future?
The first step in creating a good group of individuals to oversee your finances and investments is to appreciate how important this committee is to your future. While it may seem easy to collect various individuals from within your organization who seem like they will be good “team players,” this method is usually a mistake. Each member of the finance committee should be selected carefully without exception.
In addition, there should be a written investment committee charter that authorizes its formation, purpose, roles, and responsibilities, as well as its meeting schedules.
In selecting individuals to be on the investment committee, it is best to have at least one person with some experience in the financial / investment field. While the other members need not have direct experience, they should demonstrate a willingness to learn about investing through meetings and outside resources.
Every member of the investment committee has a fiduciary obligation to the organization. This requires many important character traits such as high moral character, the commitment to avoid conflicts of interest, a deep knowledge of the foundation’s mission, and of course the ability to attend all meetings. A member with a great background in investing, but who rarely attends meetings, is less than ideal.
To ensure your investment committee stays true to their fiduciary obligations and charter, it is highly recommended that they hire an outside investment manager. In doing so, they can bring in a team that can telegraph the current financial market conditions and can serve as a well-seasoned sounding board for questions and thoughts from the committee. Hiring an outside investment manager also goes a long way to fulfilling the committee’s fiduciary obligations. As with hiring any outside counsel, the committee should have well-planned criteria for this selection and a process to monitor the adviser.
Members of the investment committee are often exposed to differing opinions about the state of the economy or the direction of the financial markets. Some of these thoughts and media opinions can rightly be debated. However, a good committee member needs to bring an open mind, a willingness to listen to the professional investment manager, and above all be non-argumentative. A careful balance of open-mindedness and curiosity usually does the trick!
In the end, a well-formed investment committee will put the odds in your organization’s favor to ensure better communication with the board of directors, to fulfill your fiduciary responsibilities, and to generate successful long-term investment results for a sustainable future.
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
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Jul 17 2019 
Dances with Bulls… & Bears
Late Cycle Opportunities and Risk
As we enter the second half of the year global stock indexes have exceeded almost every strategist’s expectations. This powerful advance has just slightly erased the entire steep decline of 2018. It is unusual since it hasn’t been based on any strong underlying themes. In fact, stocks have rallied into declining economic growth and corporate earnings, a tariff war, and a Federal Reserve which has become concerned about the potential for a recession. So what gives? Is the stock market vulnerable? Is there more upside left? I would suggest a little of both.
During the later stages of an economic expansion, stocks often stage a “super rally” before running into trouble. Investors who recall 1999’s astonishing advance just before the 2000-01 bear market (-50% for indexes) can attest to this phenomenon. Like today’s rally, ‘99 came after a significant warning decline in ‘98 (Russian debt crisis). That decline was quite similar to the mini bear market of last fall. Late-stage rallies like today or others in history can go on longer and higher than investors expect – usually on less than perfect economic and earnings growth – and can be tricky. Our human behavior doesn’t want to miss a stitch of any upside, but we also don’t want to be vulnerable to a significant decline. There are several ways to play this scenario.
So far my strategy for this late stage rally has been to have less stock exposure. Sacrificing some upside to mitigate risk and adding to stocks only on market corrections and or when we find unique situations. At this point, your portfolio is 2/3rds invested as opposed to 100%, but given that the Federal Reserve may lower rates to “save the market”, what if the late-stage rally lasts another year?? Should we be more invested? Yes, but only during market pullbacks.
As long as you add stock exposure during market corrections, as I suggested did in May, you are assured of taking less risk and getting your portfolio closer to index-like returns over time. Each time indexes trade down, your portfolio holds up better and your opportunity to add stock presents itself. It’s a “dance” of sorts and I know this process can test the patience of the most aggressive, growth-oriented investor, but historically it has worked. When I say it worked, I mean it gained return while managing risk.
Over the next few weeks, I will be in the thick of earnings reports for the second quarter. I believe these earnings will be less than expected and coupled with continually weaker economic data and tariff pressure. Investors should expect a normal market pullback from current levels and use such a pullback as another opportunity to add stock exposure.
You can continue to gain profitability in this late-stage bull market, but it is a riskier environment and one that requires you to be aware of downside risk. Keep in mind that should stock prices begin to fall more than normal, you should be willing to reverse your “dance” pattern, reduce stock and sector exposure, and continue to have stop-loss orders to fend off a catastrophic loss.
I hope this short update is helpful as we head straight into the earnings reporting season and provides clarity on our opportunistic view of the markets.
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.
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Jul 01 2019 
“Goodbye Yellow Brick Road?”
Fed Pivots, Trade War Ensues and Earnings Loom
Over the past 18 months, global investors have experienced a number of crosscurrents which created quite a bit of drama, yet yielded little upside in global stock markets. For those less invested during this strange period, there has been little missed opportunity. During the past year and a half I have witnessed stock indexes attempt new highs not once, but three times, without success.
I find this current fourth attempt of interest, since it is in the face of impending earnings results, well-documented slowing economic growth, trade wars and an inverted yield curve – all of which has caused the Federal Reserve to finally agree that we may have veered off “the yellow brick road” as they now consider lowering interest rates. If and when the Fed reduces rates, will it be too late given the well-publicized weakness in so many economic indicators? And what should investors anticipate for the second half of this year?
Source: Bloomberg In many of my previous Strategy Updates, I have emphasized the importance of data: economic and corporate profit growth is essential for meaningful stock market returns. However, a third prong – policy – has played an increasingly important role in financial markets as evidenced by trade wars and the Federal Reserve. Has our path to generating great long-term returns changed? Should we say, “Goodbye yellow brick road?” I think not.
Trade wars pose a significant risk to global financial markets as companies are forced to rethink supply chains, which impacts margins and ultimately profitability. With earnings season right around the corner, there are already a few companies like Broadcom and FedEx reporting poor quality earnings with explicit citation of geopolitical uncertainties – namely the trade war! It will be interesting to see if these reports are the “canary in the coal mine.” We continue to believe that this trade war must be resolved in order for this market to resume a longer-term uptrend.
Jerome Powell and his colleagues at the Fed have pivoted their policy from just short six months ago, which has led investors to price-in rate cuts by year’s end. The purpose of lowering interest rates is to stimulate an anemic economy and inflation rate while attempting to counteract the inverted yield curve, which has historically preceded recessions. However, the idea of cutting interest rates so soon and so aggressively suggests that the US economy and moreover global economies are not on firm ground – a view we have had for some time now.
We certainly do not want to “fight the Fed” if they do decide on a more accommodative policy path like European counterpart, Mario Draghi. However, simply flooding the stock market with additional capital is a bandage on a ten-year wound, which has never fully healed post-2008. The Fed’s lack of tools – specifically the inability to cut rates further from an already low level – leaves the global economy particularly vulnerable as we go forward. This is why I stand prepared to thoughtfully add stock exposure if the Fed acts as the markets want, yet keep on hand risk management tools, such as stop-loss orders and sector management if simply lowering rates does not get this economy back on track.
While both global economic growth and earnings quality have decreased over the past few quarters, they are still positive (particularly in certain sectors), which bodes well for businesses with consistent revenue models – think goods and services you cannot live without! These are the types of companies we want in your portfolio. The better than expected index performance in defensive sectors such as utilities, consumer staples, and healthcare this year has validated my thesis.
A lower interest rate environment would also offer more interesting opportunities in the public real estate market (REITs) and select business models. I am cautiously optimistic that the backdrop of low inflation, an accommodative Fed and resilient economic and earnings data will get this market back on track. I expect several corrections along the way as policymakers and companies alike navigate this new landscape and we should stand prepared to thoughtfully add exposure to sectors and companies performing well in this environment. Should trade talks continue to break down, the Fed acts too late, or corporate profits and economies deteriorate further, be well prepared to weather the storm.
When there are periods of conflicting asset prices and data, I tend to err on the side of caution, as protecting capital in bear markets allows you to better reach your long-term goals of retirement, spending policy guidelines, or next-generation legacy. In that spirit, continue to look for further evidence of better earnings quality, economic growth, and trade resolution before becoming significantly more invested with your portfolio. I think such a period may come sooner than most investors think.
I hope you find this update helpful.
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
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May 28 2019 
The Reviews Are In!
I am grateful for the wonderful reviews that I am receiving for my second book, The Sustainable Endowment. Please take a look at what people are saying…
“I read the previous book by James Demmert called The Journey to Wealth, which I thought was excellent, so when Sustainable Endowment was released, I previewed it and was immediately hooked after reading the introduction. WOW, not only is it a well-written, but it’s a guideline on how to start a non-profit and most importantly, the ability to maintain a successful non-profit so that one’s good intentions are realized. — Amazon Reviewer
The prosperity of a non-profit must have a strategic business plan to survive, and this book gives you ten principles for success. Interesting, informative and definitely worth reading.” — Amazon Reviewer
“So helpful! All the basics covered…” — Amazon Reviewer
“A pragmatic approach to nonprofit organizations & charities. James Demmert offers both a practical and compelling guide for foundation, nonprofit and charitable organizations of all varieties. His 10 principles serve as a roadmap for establishing and growing nonprofits.
“This book is filled with enjoyable, witty quotes, which weave together and describe a process to successfully navigate organizational pitfalls in the quest of giving. The most accomplished professional investors have a commonality of process, which James offers from his tenured and successful career.
Examples of individual stock selection and risk management tools provide a successful and pragmatic framework for his audience. A must read and excellent gift for any nonprofit organizational member.” — Amazon Reviewer
“Demmert’s book is a must-read for anyone associated with the management of a foundation or endowment’s assets. The nature of ever changing committee members and their life experiences can really wreak havoc, as members like to influence investment decisions and may not fully appreciate the long term nature of an endowment. The Sustainable Endowment clearly outlines the key considerations of the Investment Committee, and Demmert does so in a clear, understandable manner…well done!” — Amazon Reviewer
“Refreshing in today’s environment, a must read! In the tradition of great leaders who empower others to uplift, Demmert delivers wings in his latest book. Savvy, pragmatic and motivational.” — Amazon Reviewer
“Important book for those starting a non-profit or struggling with one. I read the previous book by James Demmert called The Journey to Wealth, which I thought was excellent, so when The Sustainable Endowment was released, I previewed it and was immediately hooked after reading the introduction. WOW, not only is it a well-written, but it’s a guideline on how to start a non-profit and most importantly, the ability to maintain a successful non-profit so that one’s good intentions are realized. The prosperity of a non-profit must have a strategic business plan to survive, and this book gives you ten principles for success.” — Amazon Reviewer
“Amazing!
Very well written
Must read for anyone interested in non profits!” — Amazon Reviewer
The Sustainable Endowment: 10 Principles to Make Your Foundation or Nonprofit Last for Decades is a specialty business title covering foundation and charity endowment investment processes. It is highly recommended for business collections and individuals who have an interest in the structure and investment growth of endowment monies.
Nonprofit executives receive a primer that assumes a certain level of authority and familiarity with the nonprofit world. This includes a detailed discussion of setting up a nonprofit from the ground up, from selecting an effective board of directors and supportive staff to committee development, to the basics of writing the two key documents nonprofits should have for legal compliance—the Spending Policy and Investment Policy Statement.
The Sustainable Endowment then details the nuts and bolts of long-term investment strategies from a wealth manager and founder of wealth-management firm, Main Street Research, who sports some 30 years of experience successfully advising nonprofits on endowment-building procedures.
At each step of the discussion, James E. Demmert focuses on the critical choices specific to the nonprofit culture, supporting his introductory intention: “The core of this book is about how nonprofits can learn to invest their endowment to maximize profitable results while limiting their risk.”
The book is no light review of investment principles. It outlines many major pitfalls nonprofit executives need to understand in order to carefully assess financial markets and invest to keep their ships afloat. Demmert warns about the consequences of bad investing: “In addition to the loss of growth in value or income in a down market or during a recovery, the math gets even uglier when nonprofits need to make withdrawals during that time to use in their operations or to fund their causes. Each time you withdraw, you reduce your capital base — and that creates a “double whammy.” Furthermore, the effect of taking capital away from your portfolio while it is in a downward trend or in recovery mode adds tremendous pressure on the percentage of market increase you now require to attain the full recapture of your original investment amount.”
Charts are peppered throughout the book to provide support for the analysis and recommendations, along with textual explanations about historical approaches to investment management versus the needs of modern nonprofits. Demmert offers many insights specific to economic trends that impact nonprofit endowments.
Even more important, The Sustainable Endowment juxtaposes its recommendations with supporting statistics, historical precedent, and examples of investment fallacies and truths. This creates a powerful connection between “Smart” investing savvy and the specific concerns of nonprofits to remain sustainable to achieve their laudatory missions.
With its core of seven basics of investment management geared to the structure, purposes, and special requirements of the nonprofit, The Sustainable Endowment creates a clear blueprint for executive success and is a top recommendation for any business reference library where nonprofit leaders are patrons and readers.
— Diane Donovan, Midwest Book Review
An engaging breakdown of investment strategies for maximizing security and growth in nonprofit endowments.
Veteran portfolio manager Demmert (The Journey to Wealth, 2016) draws on decades of experience to point out common mistakes in nonprofit investing. He highlights 10 clearly developed, easy-to-understand principles that nonprofits may use to maximize their assets.
He begins by focusing on the structures that put nonprofits on courses for financial success, such as a clearly defined staff and board of directors with follow-through, as well as spending policy and investment policy statements that will govern the nonprofit when leadership changes.
Many suggestions are about organization and delineation, such as Principle 2, which concerns getting the right people with the right experience onto finance and investment committees. The rest of the text focuses on investment itself, showcasing how safe investments are helpful in volatile markets, but that truly maximizing one’s endowment requires “aggressive pro-active management” to both avoid major losses and see major gains.
He rejects the popular advice to “Set and Forget” one’s endowment in a diversified investment portfolio, as a whole-market crash will substantially reduce assets in that scenario. Instead, he wants nonprofits to understand the strategies that financial asset managers use, stressing how the market is cyclical. This work employs an earnest, thoughtful tone, and it will be clear and understandable to those outside the finance world.
Even nonprofits with less substantial endowments will benefit from the organizational structures that he suggests. As he points out, “Clearly this new era of investing requires in-depth research, time, and experience. Success today requires a disciplined process and tools that can help manage risk and return.” He also leaves room for new developments in investing and suggests that nonprofits continue to actively evaluate available options.
A digestible collection of insider tips to maximize nonprofit gains.
The Sustainable Endowment is a helpful and inspirational financial how-to guide for nonprofit leaders.
James E. Demmert’s useful book, The Sustainable Endowment, is directed at nonprofits with advice to take charge of their financial futures. Arguing that the world’s financial picture has changed significantly and that nonprofit boards can no longer “set and forget” their asset allocations and endowment funds in various monetary funds, but must take a more active role in money management, the book places the contemporary market in historical context.
Charts and graphs help to explain the impact that fees and hidden costs have on an organization’s bottom line. The text calls on nonprofit leaders to engage with their financial data down to granular details and empowers them to make difficult decisions about specific stocks.
The text is focused on managing and growing endowment funds. It uses a mixture of practical and inspirational advice aimed at nonprofit leaders, written in a way that laypeople can understand. Its tools and ideas include having a committee manage funds and advanced notions of asset allocation and risk management.
The text is organized around ten principles and moves from setting up the right foundation through to drafting spending policies, selecting stocks, and using stop-loss orders. Each technique builds upon those before it, and the text moves in a logical fashion. Chapters begin by recalling the high points of those previous, helping to cut through to the book’s main ideas.
Textbook-like and with occasional personal asides, the book takes the time to define its key terms, ideas, and topics, including the notion of SMART investors—an acronym that stands for Strategic, Modeling, Attention, Reliability, and Trust. Its complex material is presented in a useful way. Its design is attractive and professional and its advice is credible and approachable.
Effective in encouraging nonprofits to consider how much money is needed for sustainability, the book raises thoughtful questions like how to consider asset allocation, hire an expert, and determine how much it’s safe to spend from the endowment each year. Thoughtful insights and analyses related to financial trends provide important context for considering how to invest. It references techniques and formulas but leaves out the fine points of related calculations.
Dense and difficult financial material is presented in an educational, if not expert-making, way. A good starting point for nonprofits hoping to secure their legacies, The Sustainable Endowment is a helpful and inspirational financial how-to guide for nonprofit leaders.
— Foreward Review, Jeremiah Rood. June 20, 2019
Anyone who has managed a non-profit knows all too well the ever-present need to raise and manage the funding necessary to sustain the organization. In The Sustainable Endowment, author James Demmert has written a guide for doing just that.
Every year, there are many new non-profit organizations coming on the scene, most with good mission statements, goals and some funding. Some make it to the next level and receive one or more endowments, and even fewer really know what to do with that funding to make it last.
In this book, you will find ten basic principles from the establishment of good management, creating a clear vision of how the money is invested and spent, how to maintain stability for decades to come, and much more.
This is a book that is a must-read for anyone involved in or planning to start a non-profit foundation.
— Linda Thompson, Host of www.TheAuthorsShow.com
Listen to my interview with Linda Thompson.
Wishing for the best outcome for all non-profit groups, James E. Demmert has written ten key principles to remember when it comes to running an effective and successful non-profit organization. Being an expert in non-profit investment management, Demmert has a few lines of credentials to back up his advice. Demmert has advice for readers on being a smart investor in their company, along with providing acronyms to help the reader remember ways to be SMART about their business, especially since the business/organization was originally established to help others.
Within each chapter, there are words of encouragement from powerful figureheads. Along with encouragement are examples of positive and negative situations that are likely to arise during a normal workday. Starting at the beginning of the book, you will explore ways to establish a smoothly running foundation. A big part of that is knowing your staff and the members on your board in order to ensure that your organization is run smoothly and effectively.
Next, you’ll explore your investment committee and investment manager, along with committee members and your board of directors. Money is always a hot topic, so understanding your spending policy and investment policy will help keep your organization above water, so you need to have both an Investment Policy Statement (IPS) and a Spending Policy.
Understanding the stock market and various funds, especially in relation to how they have behaved in the past, will help with the booms and the busts from the stock market and with SMART investments. Each type of investment will have to be evaluated for the right risk level, if it is meant to be aggressive or conservative, and what your goals for that type of investment will be. Asset allocation, Rates of Return (RORs), and the bull and bear markets are other topics of discussion as well.
Full of graphs, charts, and insightful information, The Sustainable Endowment is a must-read for people who are interested in starting, or who have already established, a nonprofit organization.
The purpose of nonprofit organizations is crucial for the well-being of our society to help those who are in need of help, through financial, physical, educational, or spiritual means. As a nonprofit organization, you are exempt from paying taxes, but with this benefit, it is crucial that you have (or establish) the means to handle your money well to keep the organization going for many years, to improve the quality of life for many more generations.
With so much to think about when running a nonprofit, it is of high importance that you get the help you need anywhere and from anyone possible, and in this case, you are safe with James Demmert.
— Rachel Dehning, San Francisco Book Review
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.
