Charitable donors are increasingly interested in how their gifts are invested — but too often their perception of what constitutes an appropriate investment strategy may be more a dream than reality. When a donor's ideas about investing turn out to be incorrect, it can lead him or her to feel confused, disappointed or even angry. It may cause the donor to mistrust the advice that he or she has been given. The fallout is a much-less-than-ideal gift.

The seven misconceptions detailed here can be hard to dispel, as they often appeal directly to a donor's emotions. Believing some of these misconceptions might make investing seem less daunting. To avoid disappointment during the life of the gift, it is crucial to convey the reality of each situation to the donor in a clear, straightforward manner.

1

Trust Investments Will Always Appreciate

Reality: In order to attain greater returns in the long run, donors must be willing to tolerate short-term losses.

2

Recent Market Trends Will Continue Indefinitely

Reality: It's rare that a particular asset class would ever be the top performer for two years in a row. Assuming that recent trends will continue without looking closely at the details is a recipe for disaster.

3

It's Better to Take a Higher Payout Rate From a Charitable Remainder Unitrust

Reality: A lower percentage payout on a larger principal amount is often better for the income beneficiary than a higher percentage payout on a principal amount that is diminishing due to distributions.

4

Investors Should Get Out of Financial Markets When Markets are Declining, and Try to Get Back in When Markets Are Poised to Rise

Reality: It's impossible to consistently time the market profitably, and being out of the market for even a few days can dramatically impact investment performance.

5

Don't Sell the Stock That Was Used to Establish the Charitable Remainder Trust

Reality: Diversification is the best way to reduce the risk exposure of a portfolio. By holding a variety of assets that are affected differently by changes in the market, it's possible to diminish the amount of volatility the portfolio may experience.

6

You Can't Lose Money Investing in Bonds — Especially U.S. Government Bonds

Reality: All fixed income securities have the potential to lose value, as they are exposed to both interest rate risk and credit risk.

7

Changes to Asset Allocation Should Be Based on Gut Instincts, or What Commentators Are Saying in Response to Recent Events

Reality: Experienced investors understand that a successful investment strategy relies on discipline, maintaining a long-term perspective, and often involves sticking to principles even when doing so may feel uncomfortable in the short run.

“At the end of the day, the donor's philanthropic goal is what matters most. The investment strategy is simply the means to accomplish that goal.”
The key to truly enhancing the donor's understanding of the investment process is to have proactive and engaging conversations.
Initiate the Investment Conversation Early

Timing is key to getting off to a good start with a charitable gift. It is important to talk with the donor about the concept of trust investing when establishing the gift structure.

Don't Assume the Donor's Level of Interest in Trust Investing

Although the donor may not have given any indication that he or she is interested in knowing about the trust's investment strategy, that apparent lack of interest often changes — quickly — when beneficiary payments decline.

Stay in Touch

The importance of staying connected with donors is well-established. Regular reviews of a donor's trust portfolio can uncover changes in investment goals and risk tolerance, and help set realistic expectations for the future.

  • Disclosure

    This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. ©2016 The Bank of New York Mellon Corporation. All rights reserved.