During market volatility, nonprofit leaders and board members can begin to get nervous about the endowments investments. While most nonprofits can refer to their investment policy for guidance, it also helps to remember three important concepts when reviewing your nonprofit’s long-term investment.
1. Target allocations are an investor’s friend.
We work with our clients to develop a target asset allocation after a careful review of their short, medium and long-term needs. For nonprofits, this may be a consideration of cash reserves, short- and medium-term capital project needs or specific aspects of their Investment Policy Statement. For our individual investors, this may be taking into account time horizon until end of plan (life expectancy), medium term goals and the ability to start and stop income earning.
The bottom line is that we develop a target allocation and stick to that allocation unless a change to the overall financial plan is warranted. We will not recommend changing target allocations based on reaction to current market or economic conditions. Selling in a down market, then hoping to hop back in when the market hits bottom is not a strategy. Staying on the sideline, in cash, during a volatile market is also not an option. As board members and nonprofit leaders, we must be fiduciaries over the investments and ensure they are invested prudently which means we can’t stay on the sidelines and “time the market”.
It took 12 months for the Vanguard Total Stock Market Index (VTI) to recover during the 2008 crisis (October 1, 2008 to October 1, 2009) with the trough at March of 2009. As an investor, if you “hopped back in” after the market started to recover you would have sold at a loss and bought at a higher price rather than just waiting it out.
2. Broad diversification serves you well.
The more concentration you have in an asset class, the steeper the decline. The S&P 500 is comprised of the 500 largest cap stocks compared to a broader-based index like VTI which has 4,107 equity holdings.
Many investors felt on top of the world with gains in technology stocks over the past five years (2017 to 2021), especially with the steep rise during the pandemic. Since December 31, 2021, Meta (formerly Facebook) has lost over 40% of its share price including steeper declines during the 2022 bear market. If nonprofits are invested in broad indices, then its risks are spread out among a broader set of stocks rather than just a concentrated group of a few stocks.
3. Think Globally.
A balanced portfolio of global asset classes such Fairlight’s Global Market Portfolio allows investors to participate in long-term equity returns across a range of US, international developed and emerging markets equities as well as participate in broad, global fixed income assets classes including emerging markets corporate and government debt. REITS and inflation-protected securities round out the broad asset class portfolio. The Chart below shows the Callan Periodic Table of Asset Classes and you can see the year-to-year shift in asset class returns. From one year to the next, you are likely to curse one asset class while smiling and appreciating another.
For year-end 2022, only Cash Equivalents were at the top of the return chart at 1.40%. That isn’t saying much considering returns were dismal for 2022. While our recommendation is to stay the course towards your target allocation, it does make sense to periodically check your financial plan and your financial resiliency. Do you have the cash reserves to weather an unplanned liability over the next 18 to 24 months?
For your planned liabilities, do you have funds set aside in a principally protected investment? As always, Fairlight is ready to have discussions on these and other topics when you need it. We know it can be disconcerting to watch the day-to-day volatility in the market and watch your portfolio for paper losses. Remember your financial plan and your target allocation. Then walk away from the computer, your phone, the TV and focus on other things. It’s our job to watch the day-to-day on your behalf.
Talk to the financial experts at Fairlight Advisors to learn more about managing your nonprofit’s investments. Schedule a free consultation today!
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