The Blatt Watch by Peter Blatt: How an Individual Can Invest like an Endowment (e.g. Harvard)

From the desk of Peter Blatt

July 26, 2012

It is true that charities, such as Harvard, have a large amount of assets. However, just like an individual investor they have income needs to maintain their lifestyle. The important question is how does a charity invest to not lose money in these volatile times and still create income for life? What lessons can you learn as an investor from a large charity to allow you to have income without the same level of risk encouraged by the large brokerage firms?

The answer is simple. Stop investing with retail investors. Move to the institutional level. The groups that have been helping charities invest for many decades. Stop buying over the counter mutual funds and stop picking stocks that go up and then down with the market.   Buy income producing items that have less volatility. The charities have been doing it for decades; individuals are just waking up to the ability to demand more.

To understand this concept better you need to understand the three stages of investing.

The first stage is Accumulation. This is when you are in your early 20s to late 40s and do not care if the stock market goes down. You have the ability to make up any losses in the market. Statements such as, “I don’t even look at my 401(k)” or “I just buy and hold…   that has always worked” are heard. This stage is served or serviced by the retail investors such as the Merrill Lynches, Wells Fargo, Schwab, TD, AmeriTrade, etc. of the world.

These groups sell a product to you.

It is called a mutual fund and its job is to match or exceed the index it is compared against. This group usually does not have a fiduciary duty to you. They only need to make sure the product is suitable for you. They traditionally sell and sell and sell you a group of mutual funds.

This stage is the area most people start and stay in.

Charities and Endowments are not managed here. It would make a donor very upset if his or her favorite charity lost more than 10% of its money in any year. Imagine a charity with $3,000,000 of endowment losing $300,000 in one year! That takes a lot of individual donors to make that up.

Most people have portfolios where they can lose 35 to 40% in any year. This would be $1,200,000 of this charities money. Remember when your portfolio went down in 2008? In 2008, the S&P 500 dropped over 38%. Charities do not operate in the accumulation stage, and arguable you should not also.

The second stage is Preservation. This is the stage when you are about to retire or have retired and all you have is your nest egg. You have to live off this money for the rest of your life. You would like as much income as possible; without losing your principal. You want safer investments. You try to limit your losses to 10% and try to have some capital appreciation. This is how most charities and endowments invest. They need their investments to produce income for their “lifestyle” and want some safe growth. They diversify among institutional investments that produce income.

Usually the charity has one investment consultant who works closely with their investment committee and/ or board to choose the right manager(s). This investment consultant has a fiduciary duty to really understand the income needs of the charity. In choosing an investment consultant the charity looks for someone who understands the stages of investing and does not place the charity into the first phase.

The little known secret is that the same investment choices for the charity are available for individuals. The key is to work with the right investment consultant. The investment consultant will help choose among the seven different ways of making income that don’t have the same interest rate risk as municipal bonds.

The third stage is Distribution. This is the stage when you die and tax efficiently transfers your assets to the next generation. This stage is rarely seen on the charity level and is usually not done effectively on the individual level.

To invest like a charity you need to stop talking to the accumulation organizations. You need to find a group that works at the Preservation level. A group willing to take on a fiduciary responsibility regarding your nest egg.   Make the right choice.

Choose Blatt Financial Group. Call Peter today for a free consultation at (561) 625-0900.

Until next time,