Gregg S. Fisher
The last five years have been kind to charitable foundations, civic-minded corporations and wealthy individuals who regularly make significant charitable donations.
But it’s the next five years that will be the true test of their philanthropic spirit. In the current economic environment, the fates of many charities hang in the balance.
Charitable giving in the U.S. set a new record in 2006, reaching $295 billion in total gifts that year alone.
Driven by the steady upward march of the stock market — the S&P was up over 15 percent –charitable donations moved in lock-step, rising on average one-third as fast as the broad stock market since 1990.
Now, with the market in turmoil, charities across the country are panicking that the same logic that drove donations up over the past several years will now serve as the
anchor that drags them down.
While those concerns are valid, it is important to recognize that charitable giving is about more than just cold logic.
Consider a recent model of a hypothetical scenario in which a foundation invested $1 million into the U.S. MFS Investors Trust in 1929, right before the Great Depression decimated the stock market.
If the foundation had withdrawn its mandated 5 percent payout each year, it would still have a strong current value exceeding $10 million.
While the first-year withdrawal would have been only $45,000, the most recent withdrawal in December of 2007 would have been $582,000.
That original $1 million invested in 1929 would have reached a low of $288,000 at the bottom of the Depression, and would not have been restored to its original value until 1954.
Would the foundation’s board have allowed itself to weather that storm?
Behavioral finance teaches us the most important thing a donor can do is exercise restraint on the way up, and maintain confidence on the way down.
Defensive stances in recessionary times will guarantee the ability to continue allocating money to charity, while the voice of sobriety in boom times will rein in excessive donations.
And if clear heads prevail, philanthropic activity has no reason to grind to a halt.
There is no way to avoid the negative impacts of a recession on everything from sales of Louis Vuitton purses to contributions to the fight against cancer, but before we look at both as luxury expenditures, we need to take a look at our real priorities.
Sure, it feels good to give away money when it doesn’t cost us anything.
But, with logic as a factor, wouldn’t it feel better to give it away when it costs a great deal?
Gregg S. Fisher is president and chief investment officer of Gerstein Fisher, an independent financial advisory firm based in New York.