The 3-Way Tradeoff
By Jason Weckel | Fortify Investment Committee
What do endowment funds and retirees have in common?
As a financial advisor, I’ve been helping families take their hard-earned savings and transition it to a portfolio that will sustain them for the rest of their lives. With the combination of increasingly early retirements (sometimes not by choice) and general advances in healthcare, this can be a daunting task. In fact, for many people, this can sometimes mean 30+ years spent living on the investments that they step into retirement with.
As a student of this process, I’ve spent a great deal of time researching and learning from some of the world’s great investors, and one recurring theme has continued to be a valuable resource to me: endowment funds. Though these institutions typically hold millions, and sometimes billions of dollars of investments, their goals are markedly similar to those of a retiree. Consider the following shared objectives:
- Both institutions and retirees need to support their objectives indefinitely, often for decades.
- Both face the challenge of balancing today’s spending needs with tomorrow’s financial security. This includes inflation, unforeseen expenses, expansion of goals, etc.
- Both need to generate growth without taking excessive risk. This is where institutional investing comes in.
Every dollar of every investment has some degree of the following 3 functions: Safety, Growth, and Liquidity. To this day, I’ve yet to find an investment that uncompromisingly provides all three of those in one place. If you could aggressively grow your money with absolutely no risk and no liquidity constraints, that would constitute the perfect investment. In my experience, the perfect investment does not exist.
Rather, it requires a combination of a wide range of investments to accomplish this goal. In many instances, it is possible to solidly achieve two of these objectives. Consider the stock market; equities have traditionally provided healthy growth over extended periods of time. They also tend to be very liquid, with modern trading platforms allowing individuals to buy and sell holdings in seconds. But are they guaranteed to never lose money? Even a neophyte investor knows this not to be the case.
What about cash and other short-term banking tools? Safe? Check. Liquid? Yes. Growing? Hardly. When money is held in positions that protect the principal while providing immediate liquidity, it is the growth that is usually compromised. This is where the third combination comes in: safety and growth. Oftentimes when an investor is willing to compromise on liquidity, they are able to find better returns with significantly higher levels of safety. In the world of investing, the most common example here would be long-term debt instruments (bonds, treasuries, etc.). Notwithstanding current relatively low interest rates, these types of tools have historically provided healthy returns over long periods of time with high degrees of safety, but they come with limited access and can carry significant penalties if accessed before their maturity date. This is also where alternative investments can fill a much-needed space in the portfolio, providing growth that is lacking in the current fixed-interest rate environment.
When building a portfolio that will last decades, these compromises in investments must be made. Endowment managers understand this trade-off well. Their goal is not to avoid all market fluctuation. Rather, their goal is to build a portfolio that can endure market cycles while continuing to support the institution’s mission. That requires diversification, discipline, and a willingness to match assets to time horizons.
Safety does not require every dollar to sit in cash. The real risk in longevity planning, whether institutionally or personally, is not only market volatility, but the loss of purchasing power, i.e. inflation. Diversification is the bridge between safety and growth. Liquidity should be planned but not maximized at the expense of growth.
A well-constructed portfolio is only part of the equation. Just as individuals planning for retirement can benefit greatly from a financial advisor, endowment funds rely on experienced investment committees and professional managers to navigate changing markets and long-term obligations. If utilized properly, they help bring valuable perspective, effective strategic planning, and even can ensure a level of accountability and discipline to the process. This further ensures that decisions are made not only for today’s needs, but for the sustainability of tomorrow’s goals. In an increasingly complex financial landscape, having a competent, trusted investment group can provide both clarity and confidence to the growth of your endowment fund.
By Jason Weckel
Jason is currently serving as one of Fortify Foundation’s investment committee members. He is a partner in Ironwood Financial Group, a financial advisory firm in Greenville, SC. As an advisor at Ironwood, Jason brings 16 years of comprehensive financial planning and investment management to his clients. He particularly enjoys communicating and helping clients understand the complex and dynamic changes that affect our economy, markets, and investments daily. In addition to personal finance, Jason has consulted with several firms on best practices for financial advisors and has contributed to Fortune magazine on that topic. After having spent 15 years in Colorado where he enjoyed skiing, biking, and serving as treasurer at their local church, Jason, his wife Jacqui, and their 2 children moved back home to South Carolina. He and his family enjoy serving in their local church body, snow skiing, biking on Paris Mountain, and good BBQ.”