Getting started with stocks

One would normally expect almost all long-term charitable investors to have a healthy allocation to stocks. This is not the case. Based on our analysis of 500 private Ontario foundations with at least $1 million of investment assets, we find that about 35% of foundations hold only short-term investments such as cash and GICs, avoiding long-term investments such as stocks and bonds. Some foundations have good reasons to be all-cash (typically, corporate foundations that disburse a large portion of their funds each year or foundations that anticipate winding up their operations within a few years). We estimate these foundations account for no more than 10% of the total, still leaving 25% of private foundations with a long-term investment horizon but a short-term position in cash.

The typical approach to set an asset mix consists of reviewing an institution’s investment objectives and then setting a risk tolerance based on the institution’s ability, willingness and need to accept risk. Even though a risk tolerance might suggest investing in stocks, many institutions hold back from actually investing in stocks because of complexity and cost. Below we outline a simple approach to help charitable investors get started with investing in stocks.

Getting the right mix

To provide a clear and simple example, we will make a number of assumptions. First, we will assume that a standard asset mix for long-term investors is 60% stocks and 40% bonds. Second, we will assume that some charitable investors are holding 100% cash without a clear reason for doing so. Third, we will assume that these all-cash investors would not move to 60% stocks and 40% bonds in a single leap but would take time to get there.

Starter portfolio

With these assumptions in mind, we outline the following starter portfolio:

Asset Weight in portfolio Annual cost
Canadian bonds 40% 0.10%
Canadian short bonds 40% 0.10%
Canadian stocks 20% 0.06%
Weighted annual cost   0.09%

The portfolio consists of just three assets, each represented by a single fund. The exposure to bonds is 80% and split between a broad universe of bonds (average maturity of about 10 years) and short-term bonds (average maturity of about three years). The two bond funds combined hold about 1,750 bonds, with about 70% issued by Canadian governments and 30% issued by Canadian corporations. The exposure to stocks is 20%, covering about 250 of the largest companies in Canada. All exposure is to Canadian securities only, to make for a simple investing experience without having to worry about the movements of foreign currencies such as the US dollar. Based on the mix of 80% bonds and 20% stocks, the portfolio is resilient and would have lost about 1% in 2008, the year of the global financial crisis. The holding cost of the portfolio is 0.09%, equivalent to $900 per $1 million invested. Compared to cash, the portfolio offers the potential for a higher long-term return, with relatively low risk of short-term loss.

Try this for a year

Foundations and charities currently holding cash may consider trying the starter portfolio for a year. The purpose of doing this is not to see if stocks do well but to see how simple and affordable the investing process can be. After having experienced this, institutions can then consider moving to a standard asset mix of 60% stocks and 40% bonds. This is still a simple asset mix: the stock portion is divided in three equal parts between Canadian, US and international stocks, while the bond portion holds a strong and stable mix of Canadian bonds. The journey of a thousand miles begins with a single step. In this post, we want to show how easy it can be to take the first step and get started with stocks.