When Buy and Hold Fails: From Scrambled Nest Eggs to Starting Over Easy

Perhaps buying and holding as an investment strategy isn’t feeling so good lately. Perhaps you’ve heard, eggs do have lots of cholesterol and eating too many of them can be bad for your heart. If you are one of those who have been relying solely on the conventional wisdom that buying and holding will turn out just fine, you may wake up one day with a financial heart attack from eating too many scrambled nest eggs. But don’t worry, the doctor is in, and the medicine may not be as terrible as you think.

Whether you are an individual, business, or charity, conventional wisdom says “buy and hold” is a winning investment strategy however, you could actually do more harm to your finances by holding depending on your circumstances. The key word here is YOUR circumstances. While it’s true that stocks have historically outperformed bonds and cash over the long term, there have been periods (like now) where this hasn’t been the case. Simply buying and holding can do a whole lot of harm if you don’t know exactly where you stand financially and have a good sense of what you will need to achieve your financial goals. Simply ignoring the market and hoping things will work out can be a great recipe for financial disaster. If you are close to retirement and want to draw income from your portfolio, or you are already are retired and withdrawing money, pay close attention (you Baby Boomers, I’m talking to you).

Forget returns, CASH indeed IS king, and that’s worth saying twice in today’s market environment. Cash IS KING. The question is not so much how much do you have, but how much you need. This is where we begin to scramble our eggs IMHO (In my humble opinion for those of you who are new). I’ve seen this over and over again and it goes to the heart of of why investors are losing faith in their advisers and burying their head in the sand, sticking instead to “buy and hold” and “have a long term view” to comfort them to sleep at night. That’s great if you are 20, 30, or 40 years old, but financial Russian Roulette if you are near retirement or already taking money out. Here’s why. Percentages are mostly meaningless. Generally speaking, the rule of thumb went that you could withdraw 3% from a portfolio indefinitely and not worry about drawing down principal. Go much above that number and you begin to run a risk that if the market goes down and you continue to withdraw money while the investment portfolio is down, regardless of how great of a percentage you earn when it recovers, it could have reached a “point of no return”.

Example:

How much can I withdraw from a $1M portfolio?

Using the 3% benchmark, if you incorrectly assumed you could draw $30,000 this year and raise it by 3% each year to account for cost of living increases and forget about it, take a look at this:

Assume 12/31/07, the portfolio value was $1M, you take an income amount of $30,000 on Jan 1, 2008 and assume the portfolio loses -25% over 2008. At the end of 2008, your hypothetical portfolio value would be $727,500

Assume 12/31/08, the portfolio value was $727,500, you take an income amount of $30,900 (income amount $30k inflated 3%) on Jan 1st, 2009, and assume the portfolio loses another -25% in 2009

On 12/31/09, your portfolio value would hypothetically be worth $522, 450.

The income withdrawal of $30,000 that was once 3%, is now closer to 6%. In addition, notice that while you lost 25% for two years in a row, your portfolio value of $522,450 is nearly half of what it was when you started but making 50% won’t do it. In order to get back to $1M, you need to earn almost 100%! That my friends is a case of scrambled nest eggs.

This is the danger of buy and hold when you are taking money out of a portfolio. Mother’s love to say “Ignore your teeth and they’ll go away”…I think the same is true here. Buy and hold at your own peril.

So what can you do? Good question. As I said earlier, “Cash is king”. It’s not the percentages that are important, it’s the dollar amounts. The doctor says the best prevention is a regular checkup. When you actually take the time to sit down and work through your goals, how much they will cost, and what YOU can do to help achieve them, that’s when things can begin to become clear again. Many people make the mistake of believing that good advisers can make money in any market. In my humble opinion, a good adviser helps clients make smart decisions in times like this. Perhaps taking less risk is more important and you would be willing to work a few years more in order to make that happen, OK, great. How about taking less income in exchange for taking less risk? How about making more contributions during your working years or planning to leave slightly less to your kids in exchange for not having to reduce  your income?

The fact is, there are really lots of choices that people never think to think about because they are too focused on the percentages in their portfolio. Many investors are talking to their adviser about the specifics of the investments, the portfolio strategy, or some fancy investment terms like “standard deviation”, “Alpha”, or “Beta”. Did you know that these terms ARE ACTUALLY Greek? Most advisers are actually speaking Greek to their clients. That’s not funny though, so don’t laugh…If you are simply buying and holding, it’s not a laughing matter either. As Ferris Bueller likes to say; “Life moves pretty fast…If you don’t stop and look around once in a while, you could miss it.” The same holds true for your portfolio.

Nonprofit Recession Survival Guide to Getting Donations

First the markets, then Madoff, now the Obama administration is proposing reductions in the charitable tax deduction for your biggest donors. What else could possibly go wrong? Oh yeah, I forgot to mention the snow day and nobody came to work. One thing is for certain; raising funds in the current environment is much more difficult that it was last year at this time. Here are some specific suggestions and things to keep in mind as you talk to donors:

Speak the Unspoken Truth
Personally, I like this tactic. Call it like it is. What are the most powerful four words in the English language? “I NEED YOUR HELP”. Talk to your existing donors about what is happening and the state of your organization. Tell them you need help. Let your donors know how the current environment is impacting your organization.

Be Specific With The Ask
This is something that is always a good idea. Even before the mess the last year, donor fatigue was certainly an issue. I believe that in general, nonprofits do a poor job marketing themselves when it comes to being specific about their accomplishments, how donations help, and making specific connections between the ask and the impact. Kiva.org is the opposite of everything I just said. Their supporters choose the cause (lending to a specific entrepreneur who needs a loan), and Kiva reports back on the status of the loan from the individual it was given to. It’s a terrific example of the donor getting involved directly with the cause that they support. Strategic, venture, or tactical philanthropy; call it what you want, people have been demanding more accountability in recent years. This trend towards greater accountability and transparency is only likely going to increase. Help your donors go from a “spray and pray” approach go giving, to being focused and knowing exactly what they are giving to.

Create A Donor Adviser Panel
Invite your top donors into a room for a “Manhattan Project” style round table. The objective of the group is not to gang up on them and tell them how badly you need their money, but to come together and brainstorm new ideas for raising funds. Let them know how much you have appreciated their past support and you are offering them a “no money required” way to help make a huge difference with the organization. Ally you want is their input. Not only will they feel appreciated, do you think there might be a possibility they could cough up a little extra after sitting in on that? If I were a betting man, I’d say your odds are pretty good. That’s not the objective though. Remember that. You are after their ideas and things you are not thinking about right now.

Address Financial Fear
Your donors are shell shocked with what’s going on in the markets now. Everyone is. Do you want to be someone’s hero? Address this head on. This is the one I think that nonprofits have traditionally been the most uncomfortable with. Even large organizations that have planned giving departments have struggled with “the line of control” that exists between donors and their professional advisory team. While planned giving folks want to “get that seat at the table”, and be INVOLVED in the conversation with the financial adviser, attorney, or CPA at the time giving decisions are being made, often they are not. Understand that there is a line, and there should be. Generally speaking, the unspoken truth is that donors know that planned giving officers have one motive, to get money for their organization. This is nothing new though, so what?

The real opportunity to be a hero here is to talk about some of the things that donors are afraid of now and things that they can do to feel more financially secure. The number one concern of the wealthy is that they will lose what they have. While this has always been the biggest concern, the fear is now being realized. Understand that unless your donors feel financially secure, they will likely not give at the levels they had given previously. You cannot help them feel more secure, but you can make recommendations that will. One of the things that’s at the top of the list is recognizing that donors and high net worth clients traditionally have had multiple advisers giving them advice. Their accountant is discussing their returns, their attorney discusses their will (or might not have in a while), and their “financial adviser” is talking only about their investments. Most people have no idea who they should be talking to about the big picture and their ability to achieve what’s important to them.  No wonder you have such a hard time getting a seat at the table, that’s because there usually IS NO table. The advice your donors receive is sporadic and fragmented in professional silos and generally NOBODY is discussing the big picture! Markets aside, the tax changes occurring are faster than the drop in their portfolio value and now is a good time for them to be meeting with their team to reassess where they are and reevaluate their goals.

The key to success lies in your ability to have a trusted relationship with your donor, understand what attracted them to you, what inspires them, what they are afraid of, and how to connect them with the appropriate resources who can help them achieve everything that’s important to them. To the extent you make yourself a master networker and not make it about you and your cause, you’ll be a hero. Ask your donors, “How can I help, YOU?”