March 2009
Imploding Market Challenges

Dealing with Risk and Falling Markets...

In bad times and good, the principles that vestries should follow in their fiduciary oversight of long-term investments are the same. Especially when the markets are down, it is essential not to lose your head.

Certain key decisions made ahead of time will enable you to stay the course.

Overall objectives

  • Remember the big picture. Your investment objectives are the same regardless of market conditions. First, you want your investments to keep their value with respect to inflation; second, you want a reasonable stream of funds for your current purposes.
  • Investing in the stock market has been key. Historically, the only way to achieve rate of return over time has been to invest in the stock market because the average returns of stocks have been higher than fixed income funds.
  • Deal with risk. You cannot avoid risk in investing; your job is to manage risk. 
  • Investment and spending decisions are crucial. You achieve (or fail to achieve) goals by the investment decisions you make and by the spending decisions you make.

Investment decisions

  • Consider using your diocesan investment vehicle or another similiar service. The fees are typically low, and accountability is high. Many dioceses provide a “turnkey” program that provides an investment policy, manager selection, asset allocation, spending rate, and reporting, all in one. Most parishes — even the largest ones — have trouble making all these decisions themselves.
  • Make key investment decisions up front. If you’re doing it yourself, you need simple guidelines that set out an asset allocation model — such a percentage in different classes of stocks, such a percentage in fixed income vehicles. You need to make the allocation decisions up front, so you have a road map when the terrain of the markets gets rough. Decide on the benchmark market indices you’ll use to evaluate performance.
  • Rebalance as needed. Maintain your asset allocation model by rebalancing. Rebalancing is a rough way of forcing yourself to buy low and sell high. If the stock market goes way up, and you sell stock to the amount invested in stocks back down to your target allocation, you have sold high. When the markets are down, and you put money into stocks to maintain your allocation, you have bought low.
  • Rebalancing isn’t easy. Because rebalancing means investing against the market — selling stocks when the market is rising and buying them when it falls — it is difficult to do. It is especially difficult to put money into a weak market. If you don’t have the stamina for this, the trustees who run your diocesan investment vehicle will. That’s another reason to use them.
  • Monitor and report. Be sure the vestry gets quarterly reports that compare the portfolio’s return to your benchmarks. Dollars figures are less important than percentage returns compared to benchmarks.

The investment decisions are difficult enough. Make sure you get the help you need in order to make those decisions or to delegate them to a trusted body. However, when endowments or long-term investments get depleted, investment decisions are usually not the problem; it’s almost always because the investments have been overspent. This is where things get rough
when markets are down.

Spending decisions

  • Don’t overspend. In general, assuming an allocation in the neighborhood of 60 percent stocks and 40 percent fixed income, you are jeopardizing the long-term health of your investments if you take out more than 5 percent of a three-year moving average each year. You can’t make up for overspending by hoping that your returns will be higher than market averages. When markets go down, the most important principle is this: don’t overspend your investments.
  • Don’t let your operating budget depend too much on investments. If your operating budget depends on investment return, you will have a very difficult time adhering to this principle, but you will shortchange the future of your parish unless you maintain the discipline necessary not to overspend your investments.
  • Let your investments fund the capital reserve. My strong recommendation is usually to have the investment drawdown go into the capital reserve fund. If the drawdown goes down because of market conditions, you can usually postpone a part of your capital plan without jeopardizing the existence of your parish.

If your operating budget depends on your investments, you face a dilemma when the markets go down. You can either make large (and unpopular) cuts in your budget, or you can take more than you should from your investments. It’s no wonder vestries usually choose the second course of action. The investments won’t complain when you overdraw them, and the future members of your parish are not represented on your vestry unless you remember to take them into account and do right by them.

You may promise yourselves that it is only temporary and that you’ll pay it back. Alas, these promises are almost never kept despite your good intentions. Once you start overspending your investments, you’ll almost certainly continue to do so. And thus you’ll probably never be in a position to pay it back. 

The principles of managing your investments are the same whether the markets are up or down. Foresight and discipline are always required.

The Rev. Jerry Keucher is the author of Remember the Future: Financial Leadership and Asset Management for Congregations and currently serves as the bishop’s vicar at the Church of the Intercession in New York City.

This article is part of the March 2009 Vestry Papers issue on Imploding Market Challenges