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Asset Allocation for Foundation and Endowment Investment Portfolios - Part 2 (February 2008)
One can only speculate about how much "Bubble Paper" finds its way into the these portfolios, but nearly all of them are managed by the major brokerage firms, and all such firms bonus their brokers on the basis of product sales. It is not uncommon for Wall Street to re-write the syllabus for Investments 101, redefining Quality, Diversification, and Income to suit its own dark purposes.
Continued from Part 1...
Inflation is a purchasing power issue, and purchasing power depends on income. Hoping, as many people do, for an upward only portfolio-market-value scenario is, at best, comical. A properly designed portfolio will constantly generate increasing levels of base income at varying market value levels, and that is the stuff from which disbursements are made. If the payout rate to beneficiaries is 4% (of Working Capital, perhaps) and we want to increase the dollar amount of the 4%, we need simply to increase the assets that are producing the cash flow… by reinvesting some of the income and contributions appropriately. Increasing the market value of the securities looks good but generates no additional regular spending money. In fact, higher yields are always more readily available when prices are down than when they are up… go figure. Really, go figure.
If we can (through proper asset allocation, and a portfolio management methodology that focuses on working capital) increase our investment in our income producing securities base, we can stay ahead of inflation and satisfy our commitment to whatever cause it is that concerns us. This can be done with much less risk than most not-for-profit board members have become used to in recent years while they blindly chase the gold ring of ever higher market values. Market value, though, will cycle to new highs periodically, as the stock market, interest rate, and business cycles move on down, and up, the road. Isn't the primary purpose, after all, to grow the distributed benefits?
As important as income is to the achievement of your disbursement goals, there is certainly a place for a diversified portfolio of Investment Grade Value Stocks within the asset allocation. You will have difficulty convincing your broker to stick with IGV stocks, and to trade them for short-term profits. Frankly, most are inexperienced at doing so. But your tax status, size, and mission are perfect for this kind of strategy. Your investment manager should take care of the income part of the asset allocation first, before venturing into the riskier realm of equities. Stop! No matter what you've been told lately, quality income investments are always less risky than even the best equity investments. What about the 2007 CDO mess? Junk is junk, no matter how pretty the package.
You have a fiduciary responsibility to understand what's inside your not-for-profit investment portfolio... even if you think that you are pleased with its recent performance. It just makes good sense to get another opinion. Similarly, if you donate money to a cause that interests you, the general structure and content of the investment portfolio should be of some interest. Complicated products with trunches, and multi-level ifs-ands-and-buts are for arbitrageurs and speculators. Any investment product that requires a Masters Degree in Quantum Mathematics to decipher is hiding something… and that something is excessive risk. What's in your not-for-profit portfolio?
Asset Allocation for Foundation and Endowment Investment Portfolios
The High Risk in Foundation/Endowment Investment Portfolios
If you were to look back at your foundation/endowment/not-for-profit portfolio of the late 90's, how much was invested in NASDAQ issues, either directly or in the form of mutual funds? Dot.coms? Don't be at all surprised if your more recent reports (2006 thru 2008) are replete with CMOs, CDOs, Index Funds, Foreign Investments, asterisks, footnotes, etc. This is the type of investing that is standard fare on Wall Street.
One can only speculate about how much "Bubble Paper" finds its way into the these portfolios, but nearly all of them are managed by the major brokerage firms, and all such firms bonus their brokers on the basis of product sales. It is not uncommon for Wall Street to re-write the syllabus for Investments 101, redefining Quality, Diversification, and Income to suit its own dark purposes…
Click for Details --> Asset Allocation - Part 1
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|Please read this disclaimer:|
Steve Selengut is registered as an investment adviser representative. His assessments and opinions are purely his own. None of the information presented here should be construed as an endorsement of any business entity; the information is only intended to be educational and thought provoking.
Risk Management: Income, 401k, and IRA Programs
Take a free tour of a professional investment managers' private SEP IRA program during ten years surrounding the financial crisis:
In developing the investment plan, personal financial goals, objectives, time frames, and future income requirements should all be considered. A first step would be to assure that small portfolios (under $50,000) are at least 50% income focused.
At the $100,000 level, between 30% and 40% income focused is fine, but above age 50, the income focus allocation needs to be no less than 40%... and it could increase in 10% increments every five years.
The "Income Bucket" of the Asset Allocation is itself a portfolio risk minimization tool, and when combined with an "Equity Bucket" that includes only IGVSI companies, it becomes a very powerful risk regulator over the life of the portfolio.
Other Risk Minimizers include: "Working Capital Model" based Asset Allocation, fundamental quality based selection criteria, diversification and income production rules, and profit taking guidelines for all securities,
Dealing with changes in the Investment Environment productively involves a market/interest rate/economic cycle appreciation, as has evolved in the Market Cycle Investment Management (MCIM) methodology. Investors must formulate realistic expectations about investment securities--- by class and by type. This will help them deal more effectively with short term events, disruptions and dislocations.
Over the past twenty years, the market has transitioned into a "passive", more products than ever before, environment on the equity side... while income purpose investing has actually become much easier in the right vehicles. MCIM relies on income closed end funds to power our programs.
To illustrate just how powerful the combination of highest quality equities plus long term closed end funds has been during this time... we have provided an audio PowerPoint that illustrates the development of a Self Directed IRA portfolio from 2004 through 2014.
Throughout the years surrounding the "Financial Crisis", Annual income nearly tripled from $8,400 to $23,400 and Working Capital grew 80% $198,000 to $356,000.
Total income is 6.5% of capital and more than covers the RMD.
Managing income purpose securities requires price volatility understanding and disciplined income reinvestment protocals. "Total realized return" (emphasis on the realized) and compound earnings growth are the key elements. All forms of income secuities are liquid when dealt with in Closed End Funds.
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|Please read this disclaimer:|
Steve Selengut is registered as an investment advisor representative. His assessments and opinions are purely his own and do not represent the views of any other entity. None of his commentary is or should be considered either investment advice or a solicitation of business. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be or should be construed as an endorsement of any entity or organization. The reader should not assume that any strategies, or investments mentioned are any more than illustrations --- they are never recommendations, and others will most certainly disagree with the thoughts presented in the article.