Most high net worth individuals are familiar with asset allocation. How you’re going to allocate your assets is one of the most important financial decisions you can make when it comes to your investments. We have touched on this subject previously, but we have yet to discuss how asset allocation can be applied to spheres outside of your own personal finances.
Today, we want to discuss how asset allocation can be used as a tool for foundation and endowment investing.
Many of our clients are involved in foundations and endowments, and it can be a balancing act figuring out how to reconcile your foundation or endowment’s philanthropic needs with its financial needs. Employing asset allocation can be a very effective way to generate enough revenue so that your charitable organization can be successful in its mission.
Before outlining this balancing act, we will provide a brief review of how asset allocation is a valuable investment tool.
Asset Allocation for Investing
There is no one generic definition, but essentially it is an investment strategy that involves diversifying your investments across different asset categories. Doing so helps to achieve a strategy that caters to your own personal risk-reward comfort level and needs.
The reasoning behind asset allocation is that, generally speaking, the ebbs and flows of one asset class will not occur at the same time as another asset class. So if you spread your investments out over multiple asset classes, you should be safeguarding your investment portfolio from experiencing too many losses at once. Essentially, effective asset allocation allows you to choose a level of risk in investing that fits in with your own financial goals and needs.
So what exactly are the asset categories, or classes, that you should be including in your asset allocation strategy?
Where to allocate assets
There are three traditional asset classes that are the most commonly used in asset allocation strategies: stocks, bonds, and cash.
Stocks generally have the highest potential for both risk and reward, which means that investing in stocks tends to offer the most potential for growing your portfolio. The stock market is known for its volatility, which means that if you are looking for short term investment returns, investing heavily in stocks may not be the best strategy.
But are you looking for a long term investment source – maybe you are saving for retirement? Then riding out the ups and downs of the stock market over time will likely pay off.
Maybe the volatility of the stock market does not appeal to you. If you are looking for more straightforward investments, then investing more heavily in bonds may be a good option.
Bonds typically fluctuate less than stocks, but of course do not offer as high of returns. Bonds can also be a good option if the time horizon your investment goals are more short term. Since the risk level is lower, you have a higher chance of seeing a positive return over a shorter time period.
Cash and cash equivalents
If you’re quite risk adverse, investing in cash and cash equivalents is even safer than investing in bonds. There is an extremely low chance of taking a loss in cash or cash equivalent – savings deposits, money market accounts and funds, etc. – investments.
However, investing these assets also has an extremely low potential for growth. This is why we recommend asset allocation. A portfolio only made up of cash investments is extremely secure but will not grow over time.
Spreading your money around these three traditional asset categories offers the best chance of balancing your risk-reward ratio.
Stocks, bonds, and cash are the “big three” of asset allocation. Yet there are several other alternative assets that can be effective for diversifying your portfolio.
- real estate investments
- commodities such as precious metals
- derivatives, options, and futures
- hedge funds
- venture capital
- foreign equities
Some of these less common asset allocation classes can be very interesting ways to diversify your portfolio. They generally attract for more experienced investors, and tend to have a fairly high monetary barrier to entry.
Applying Asset Allocation to Foundations and Endowments
So the central question is, how can these tenants of asset allocation be applied to investing for foundations and endowments?
This question is becoming more relevant in today’s investment climate. Foundations and endowments have truly become some of the most influential players in the investment game.
The long term perspective of these investments enables them to take on more risk than many personal investors are willing to commit. Yet, it also enables them to use a variety of inventive asset classes and strategies.
Foundations and endowments
Before getting into the specifics, we’ll define what exactly we are referring to when we talk about “foundations” and “endowments.”
A foundation is simply a type of nonprofit or charitable trust that provides and distributes funding for other charitable organizations, usually through grants. Foundations can establish endowment funds, which will in turn make investments, and then withdraw from those investments for charitable distribution.
Clearly, the investments made by foundations and endowments are of great importance. These investments are responsible for the amount of money available that foundations and endowments are able to distribute to their charities.
Some successful examples
The largest and most successful foundations and endowments have become true investing powerhouses. Many have billions of dollars in gross assets, enabling them to do a tremendous amount of charitable work.
The President and Fellows of Harvard College (Harvard’s endowment fund) – for instance – has $56.37 billion in gross assets. Another example is the Bill and Melinda Gates foundation, with $41.31 billion.
Obviously, most foundations and endowments will not be as lucrative as these. But it is still worthwhile looking at organizations like these as aspirational examples.
Advisors for Investing in Foundations and Endowments
Most foundations, of course, operate on a much smaller scale. According to a survey done by CAPTRUST Financial Advisors, most of the smaller foundations and endowments reported only having one staff member who focused on investments.
To make up for it, though, these organizations often had an asset manager or investment consultant to offer them investment advice. This advisor would guide them through the complex processes of asset allocation, mission aligned investments, and more.
And this is where we at Saddock Wealth support our clients. We have the experience and expertise to help your foundation or endowment find an investment approach that works for you. This is especially true for both in terms of your financial needs and your charitable needs.
Balancing asset allocation and growth with charitable giving
Every foundation or endowment has unique investment needs and objectives to consider when designing a portfolio and choosing asset classes. Some foundations are more established and able to take on greater risk with their investments. Others are looking for safer investments with more guarantee.
In making investments for foundations and endowments, it is also important to consider making mission aligned investments. Oftentimes, endowments will be either drawn or opposed to certain assets, due to their relationship with their mission.
In the case that a foundation is drawn towards a particular asset class due to its bearing on the foundation’s mission, all is not lost. There can be an opportunity for the two parties to form a mutually beneficial relationship moving forward. This is the sort of investment advice that our years of experience in financial services can provide your foundation or endowment with.
We see every investment and every asset class as an opportunity for your charitable organization to be as successful as ever. As such, this might mean minimizing risk or forming a powerful stakeholder relationship.
Investing for Foundations and Endowments
Thinking through asset allocation can be challenging for foundations and endowments. This is especially true for smaller organizations or families that may not have expert investors on staff.
At Saddock Wealth, we offer the services of asset managers and investment consultants. This way, you will have the support and advice of a company that is familiar with many types of asset classes.
The key is able to find alternative investment sources that will:
- generate financial returns for your endowment
- ensure that you meet your fiduciary duty
- set your foundation up to have sustainable institutional income for years to come
We Can Help
There are few things that affect as many areas of your life as your wealth. Treat it with the attention it deserves and it will repay the favor. Thinking about retirement, estate, or financial planning? Or do you want to use your wealth to provide for younger generations or charitable purposes? Proper wealth management is what will make it happen.
At Saddock Wealth, we bring years of wealth management experience to the table and can help guide you toward financial prosperity. Make sure your wealth is in the right hands and ready to grow in 2020. Schedule a meeting here, and we’ll discuss your best options.