Investing for Charitable Giving: Discipline Reaps Rewards

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There are plenty of fears that rob investors of sleep — perhaps none more so than market volatility. Whether investing for retirement or another long-term goal, few investors look forward to unpredictable swings in the market — and the same is true when investing for charitable giving goals. The reality is periods of market volatility are part of the investing landscape. And they’re rarely the right time to make drastic adjustments to your portfolio or your investment approach.

With the right partners and the right strategy in place, the best approach during periods of market volatility is to stay disciplined and take a long-term view. It’s an important virtue worth further exploring to help investors confidently navigate market volatility and offer a bit of peace of mind. Here are a few key takeaways for investors to consider when faced with market volatility and the impact it can have on charitable investments.

The right approach for when market volatility looms

When markets are fluctuating and the news is reporting selloffs and course corrections, staying disciplined with your charitable investment strategy is easier said than done. Doing nothing is often the hardest thing to do. Yet the research is clear: Attempts to time the market are futile. The best and worst trading days often happen in close proximity. Attempting to dodge losses often means missing opportunities for gains.

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Let’s take the COVID-19 pandemic and related market downturn as an example. Based on Vanguard calculations using data from Morningstar, Inc.¹, if an investor had exited the market in March 2020 through the recovery in July 2020, they would have seen a negative 2% return. On the other hand, those who maintained a conventional portfolio balance of 60% stocks and 40% bonds would have seen a 21% return over that period of market volatility. Even amid a historic pandemic, drastic action was the wrong approach.

When it comes to disciplined investing, the right long-term charitable investment plan — coupled with the right charitable investment partner — is paramount. Without a sound investment strategy, it will be difficult to achieve your investment goals during any market conditions, but particularly during periods of volatility. The best investment plans are built to withstand market volatility in accordance with an investor’s goals and risk tolerance and, in the case of charitable investment plans, a donor’s charitable timeframe. That indicates that the time for donors to think about how they’ll handle market volatility is when they are building their portfolio and investment strategy, not during times of major market swings. The right partner will help investors navigate this.

Different investment approaches will yield different perspectives on market volatility and discipline. Vanguard Charitable, for instance, adheres to Vanguard’s time-tested investment principles, emphasizing diversification, low costs and a long-term outlook. Finding a partner that can deliver options based on sound principles, aligned with individual investor preferences, is vital to successfully navigating market volatility in the long term. Investors cannot control market movements, but they can keep more of their returns by reducing investment costs and taxes.

Planning for the unexpected

Too often, just the suggestion of looming market volatility tempts investors to take sweeping actions related to their portfolios. Geopolitical events, interest rate changes, shifting regulations, natural disasters and other headline-grabbing events all have the potential to impact markets and short-term performance. It’s not always easy, but these are the times when investors need to stay disciplined and rely on their strategy and long-term perspective. It’s the most important time to trust that the difficult decisions have already been made and the right plan is in place.

With charitable investing, there are several actions that can help donors remain disciplined. Here are four steps:

Make regular contributions to sustain growth and granting
Stay invested through volatile times, unless a reallocation was a part of original plans
Rebalance to manage risks and maintain a suitable asset allocation
Have a plan for charitable giving

Market upswings, on the other hand, could mean opportunities to enhance charitable giving while achieving the tax benefits that come by giving with a donor-advised fund (DAF), a giving vehicle that supports immediate needs and long-term causes through grants to qualified 501(c)(3) charities. These market tailwinds could prompt investors to increase expected or unexpected giving and further their philanthropic impact.

Staying the course results in greater charitable impact

Many investors saving for retirement fear volatility or a dip in the market, especially as they near their final days of gainful employment and a steady paycheck. For those investing for charitable purposes, this timing concern is less pronounced, but no less important to consider and manage properly. When investing and giving with a DAF, the money in the account is already earmarked for philanthropic purposes and will continue to grow tax-free. This gives donors greater flexibility to execute their giving strategy.

DAFs empower urgent giving as well. When natural disasters or other unexpected giving needs occur, donors should remain disciplined and rely on their investment strategy to navigate need and the potential impact of giving. In some cases, the same causes or events creating unpredictable markets will come with a call for charitable giving that donors can support.

The concept of disciplined investing, while not a new one, is a proven approach for investors of all kinds. Keeping a long-term view and accepting the ebbs and flows of the market historically result in greater gains over time. Even better, the right charitable investment vehicle, strategy and partner can shield investors from the stress of market volatility and provide peace of mind that there is a plan in place to help them meet — and often exceed — their philanthropic goals now and into the future.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Mark Froehlich joined Vanguard Charitable, a 501(c)(3) public charity sponsoring donor-advised funds, as chief financial officer in 2019. As a certified public accountant, he works to oversee the nonprofit’s finance and operations functions. An experienced financial leader, Mark has always maintained a strong connection to the nonprofit sphere. Most recently, he was the chief financial officer at the Philadelphia Foundation.