EAs and EA Orgs Should Move Cash from Low-Interest to High-Interest Options

Summary

  • We be­lieve the EA com­mu­nity is miss­ing out on hun­dreds of thou­sands to mil­lions of dol­lars in char­i­ta­ble fund­ing ev­ery year by keep­ing cash in low-in­ter­est ac­counts in­stead of equally safe high-in­ter­est options

  • We have iden­ti­fied three al­ter­na­tives to low-in­ter­est ac­counts for EA or­ga­ni­za­tions and in­di­vi­d­ual EAs:

    • High-in­ter­est bank ac­counts which cur­rently yield 2%-2.4%

    • Prime money mar­ket funds which cur­rently yield 2.5%

    • Ul­tra-short-term bonds which cur­rently yield 2.9%

  • This ar­ti­cle eval­u­ates high-in­ter­est op­tions and pro­vides guidance on how peo­ple and or­ga­ni­za­tions can ac­cess them with ap­prox­i­mately 1–10 hours of setup time

Overview

Anti­grav­ity In­vest­ments is an EA so­cial en­ter­prise with the mis­sion of lev­er­ag­ing in­vest­ing to in­crease fund­ing for EA char­i­ties. Last year, we ad­vised EA or­ga­ni­za­tions to move an es­ti­mated $5 mil­lion in low-in­ter­est bank ac­counts to higher-in­ter­est al­ter­na­tives which is ex­pected to in­crease char­i­ta­ble fund­ing by $125,000 per year at cur­rent in­ter­est rates. We be­lieve there is an op­por­tu­nity to drive mil­lions of ad­di­tional dol­lars to EA causes by pro­vid­ing this recom­men­da­tion to the en­tire EA com­mu­nity.

Our ini­tial out­reach to sev­eral global health and poverty char­i­ties com­bined with a pre­limi­nary anal­y­sis of gov­ern­ment-man­dated fi­nan­cial dis­clo­sures (IRS Form 990) and fi­nan­cial state­ments of a broader set of or­ga­ni­za­tions in this space sug­gest that tens of mil­lions of dol­lars are be­ing kept in low-in­ter­est bank ac­counts in ex­cess of stan­dard op­er­at­ing re­serves. If ac­cu­rate, this re­duces fund­ing for poverty alle­vi­a­tion and global health in­ter­ven­tions by over $1 mil­lion per year.

We recom­mend mov­ing cash in low-in­ter­est ac­counts to safe and higher-in­ter­est al­ter­na­tives like high-yield sav­ings ac­counts, money mar­ket funds, and ul­tra-short-term bonds. Most op­tions take no more than sev­eral hours to set up and do not re­quire in­vest­ing ex­pe­rience. With the ex­cep­tion of our recom­mended cash man­age­ment solu­tion for de­posits over $250,000, which is open to peo­ple and or­ga­ni­za­tions in most coun­tries, our ex­act recom­men­da­tions in this ar­ti­cle per­tain to U.S. res­i­dents and or­ga­ni­za­tions. Our gen­eral recom­men­da­tion to place cash in high-in­ter­est op­tions ap­plies in all coun­tries.

We be­lieve Anti­grav­ity In­vest­ments and EA com­mu­nity mem­bers can cre­ate a high im­pact by ad­vis­ing EA or­ga­ni­za­tions with a lot of cash in non-in­ter­est-bear­ing and low-in­ter­est bank ac­counts to move their cash to high-in­ter­est op­tions that are within each or­ga­ni­za­tion’s re­spec­tive risk pa­ram­e­ters.

We have also in­cluded recom­men­da­tions for in­di­vi­d­ual EAs in this ar­ti­cle. EAs will be able to gain more spend­ing and dona­tion power by fol­low­ing these recom­men­da­tions. Cul­len O’Keefe recom­mended in­vest­ing dona­tions planned for later in the year in his ar­ti­cle EAs Should In­vest All Year, then Give only on Giv­ing Tues­day. Our recom­men­da­tions in this ar­ti­cle are suit­able for donors that do not want the value of their in­tended dona­tions to sig­nifi­cantly fluc­tu­ate dur­ing the year or drop be­low their pre-in­vest­ment value.

While we have spent many hours eval­u­at­ing cash man­age­ment op­tions, there may be even bet­ter op­tions out there. Please com­ment on this ar­ti­cle if you find a po­ten­tially bet­ter recom­men­da­tion!

Bank Recommendations

Bank Ac­count Background

Check­ing ac­counts are bank ac­counts de­signed for fre­quent fi­nan­cial trans­ac­tions. Sav­ings ac­counts are bank ac­counts de­signed for sav­ing money. Most sav­ings ac­counts pay an an­nual rate of in­ter­est on ac­count bal­ances; in the U.S., the na­tional av­er­age is cur­rently 0.09%.

A high-yield sav­ings ac­count is a nor­mal sav­ings ac­count that ap­peals to con­sumers by pay­ing a much higher rate of in­ter­est than the na­tional av­er­age for sav­ings ac­counts. Good high-yield sav­ings ac­counts cur­rently yield be­tween 2%–2.5%. High-yield sav­ings ac­counts are usu­ally offered by on­line banks be­cause on­line banks op­er­ate with lower over­head than banks with phys­i­cal branches.

High-yield sav­ings ac­counts have the same risk as stan­dard check­ing and sav­ings ac­counts. All bank ac­counts are in­sured by an in­de­pen­dent U.S. gov­ern­ment agency called the FDIC, which in­sures up to $250,000 per per­son/​or­ga­ni­za­tion per bank.

High yield sav­ings ac­counts can be opened on­line or in per­son at a bank’s lo­cal branch. There are many on­line high yield sav­ings ac­counts with com­pet­i­tive rates and fea­tures. The ac­count open­ing pro­cess should be fast and straight­for­ward. All of the sav­ings ac­counts men­tioned in this ar­ti­cle can be opened on­line.

Money can be eas­ily moved in and out of high-yield sav­ings ac­counts to check­ing ac­counts within 24 to 72 hours. Govern­ment reg­u­la­tions gen­er­ally limit sav­ings ac­count with­drawals to six per month.

Banks also offer cer­tifi­cates of de­posit (CDs). CDs re­quire that de­pos­i­tors leave a set amount of money at a bank for a speci­fied pe­riod of time with­out with­draw­ing it in ex­change for a higher in­ter­est rate. Cash in CDs can be with­drawn, but there is typ­i­cally a minor penalty.

Recom­men­da­tion for Balances Above $250,000

We have eval­u­ated a wide range of bank-pro­vided cash man­age­ment solu­tions and iden­ti­fied what we cur­rently see as the op­ti­mal solu­tion for bal­ances above $250,000.

Our recom­mended solu­tion is StoneCas­tle’s AAA-rated Fed­er­ally In­sured Cash Ac­count (FICA). FICA works by con­tinu­ally an­a­lyz­ing yields at hun­dreds of U.S. banks and au­to­mat­i­cally stor­ing cash at each high-yield bank up to the $250,000 FDIC in­surance limit. The to­tal cash stored with this solu­tion is in­sured by the FDIC up to $25 mil­lion, mak­ing it safer than cash stored above the FDIC in­surance limit at an in­di­vi­d­ual bank. This op­tion yields ~2.4%, has an ini­tial de­posit min­i­mum of $250,000 (the ac­count value can dip be­low this limit af­ter ac­count cre­ation with no penalty), sup­ports next-day with­drawals, and is open to in­di­vi­d­u­als and or­ga­ni­za­tions lo­cated in most coun­tries around the world. All de­posits and with­drawals must be in U.S. dol­lars.

StoneCas­tle typ­i­cally does not sell di­rectly to in­di­vi­d­u­als and or­ga­ni­za­tions. We have part­nered with StoneCas­tle to de­liver their ser­vices to any in­ter­ested EAs and EA or­ga­ni­za­tions, and we recom­mend con­tact­ing us to get started with FICA. We are work­ing with StoneCas­tle to in­tro­duce open on­line reg­is­tra­tion for FICA ac­counts in the near fu­ture. This op­tion is our gen­eral recom­men­da­tion for or­ga­ni­za­tional cash man­age­ment due to its safety, sim­plic­ity, and speed of im­ple­men­ta­tion.

Sav­ings Ac­count and CD Recom­men­da­tions for Organizations

StoneCas­tle has a higher yield and much higher FDIC in­surance than all busi­ness sav­ings ac­counts we’ve seen. For or­ga­ni­za­tions that can­not meet the min­i­mum or want to use an­other al­ter­na­tive, we recom­mend find­ing the high­est-yield busi­ness sav­ings ac­count. Or­ga­ni­za­tions can open up high-yield ac­counts at mul­ti­ple banks if they want FDIC cov­er­age above $250,000, al­though the added risk of hold­ing cash at a large and well-man­aged bank above the FDIC cov­er­age thresh­old is not con­sid­ered very high. See Ap­pendix A for a more thor­ough bank risk anal­y­sis.

Com­par­i­son web­sites like De­positAc­counts offer ranked lists of busi­ness sav­ings ac­counts. First In­ter­net Bank offers a com­pet­i­tive ~1.8% yield which in­creases to ~2% for bal­ances above the $250,000 FDIC in­surance max­i­mum.

We could not find a ranked list of busi­ness CDs. Out of the top 10 CD rates posted on De­positAc­counts, only Live Oak Bank offered busi­ness CDs with on­line ac­count open­ing. We be­lieve find­ing busi­ness CDs through high-yield on­line banks that sup­port busi­nesses is a good way to dis­cover the best op­tions. First In­ter­net Bank has ex­cel­lent busi­ness CD rates in ad­di­tion to its ex­cel­lent sav­ings rates.

First In­ter­net Bank is a smaller in­sti­tu­tion, un­like other recom­men­da­tions in this ar­ti­cle. It has the high­est sav­ings yield for busi­nesses that we’ve found; how­ever, we cur­rently do not have case stud­ies from or­ga­ni­za­tions that have tried to open a First In­ter­net Bank ac­count. First In­ter­net Bank has de­cent re­views, al­though some re­view­ers men­tion fric­tions with ac­count cre­ation and ac­count trans­fers.

Sav­ings Ac­count and CD Recom­men­da­tions for Individuals

Sav­ings ac­counts for in­di­vi­d­u­als are more com­pet­i­tive and have higher yields than busi­ness sav­ings ac­counts.

Com­par­i­son web­sites like De­positAc­counts offer ranked lists of per­sonal sav­ings ac­counts. An ex­am­ple of an es­tab­lished bank with com­pet­i­tive in­ter­est rates is Gold­man Sachs’ Mar­cus ac­count. Mar­cus has a sav­ings op­tion that yields 2.25% with a $1 min­i­mum and $1,000,000 max­i­mum. Some on­line banks list rates up to 2.45%, but be aware many of these offers may be from very new banks or ex­ist­ing banks that tem­porar­ily boost rates in an effort to at­tract new cus­tomers. See Ap­pendix A for a risk anal­y­sis of stor­ing money at banks above and be­low FDIC in­surance limits.

De­positAc­counts has ranked lists of CDs as well. Some of these CDs have re­stric­tions, like re­quiring a branch visit to open. We recom­mend us­ing a high-yield on­line bank like Mar­cus or Ally as a CD provider.

In­vest­ment Recommendations

Bro­ker­age Ac­count Background

A bro­ker­age ac­count is like a bank ac­count that al­lows the ac­count holder to buy and sell in­vest­ments, most com­monly stocks and in­vest­ment funds. Mov­ing money into and out of our recom­mended in­vest­ments typ­i­cally re­quires a bro­ker­age ac­count.

We recom­mend Van­guard as a bro­ker­age provider for in­di­vi­d­u­als. Van­guard is an in­dus­try leader that is es­sen­tially a not-for-profit, cus­tomer-owned com­pany. As such, it has ex­cel­lent prod­ucts and ser­vices with ex­tremely low fees. Van­guard has an on­line ac­count ap­pli­ca­tion for in­di­vi­d­u­als.

Van­guard is also an ex­cel­lent bro­ker­age firm for or­ga­ni­za­tions. Un­for­tu­nately, un­like its policy for in­di­vi­d­ual ac­counts, Van­guard re­quires or­ga­ni­za­tions to mail in their ac­count ap­pli­ca­tion. The ac­count open­ing pro­cess has taken up to sev­eral months from start to finish with our clients. For or­ga­ni­za­tions that would pre­fer a faster and eas­ier start, TD Amer­i­trade seems to have a purely on­line cor­po­rate ac­count ap­pli­ca­tion. We cur­rently do not have case stud­ies from or­ga­ni­za­tions that have tried to open a TD Amer­i­trade ac­count. In­ter­ac­tive Bro­kers has a slightly more com­pli­cated on­line cor­po­rate ac­count ap­pli­ca­tion which our clients have used suc­cess­fully. Non­prof­its and busi­nesses should choose the “small busi­ness” ac­count op­tion.

For EAs and EA or­ga­ni­za­tions that would like our as­sis­tance with man­ag­ing in­vest­ments in bro­ker­age ac­counts, we can be eas­ily linked and un­linked from In­ter­ac­tive Bro­kers and Van­guard ac­counts.

In­vest­ment Fund Background

An in­vest­ment fund col­lects money from a group of in­vestors and in­vests the money with a spe­cific strat­egy. In­vest­ment funds are widely used by large and small in­vestors al­ike to be able to fol­low in­vest­ing strate­gies that can be im­prac­ti­cal to in­di­vi­d­u­ally im­ple­ment. For ex­am­ple, the S&P 500 is a group of 500 ma­jor U.S. stocks that is se­lected and re­vised by a com­mit­tee. One in­vest­ment fund can hold all 500 stocks at once, mak­ing it easy to in­vest in and with­draw money from the S&P 500.

There are two main types of in­vest­ment funds used by in­vestors: mu­tual funds and ex­change-traded funds (ETFs). Mu­tual funds were the first mod­ern day col­lec­tive in­vest­ment op­tion, and they re­main pop­u­lar to this day. They are be­gin­ning to de­cline in pop­u­lar­ity due to the in­tro­duc­tion of ETFs in 1993. Un­like mu­tual funds, ETFs do not have any in­vest­ment min­i­mums. They have sig­nifi­cantly lower in­vest­ment fees than mu­tual funds on av­er­age. ETFs also have much higher tax effi­ciency, which is helpful for in­di­vi­d­u­als in­vest­ing in tax­able non-re­tire­ment bro­ker­age ac­counts, which are also known as tax­able bro­ker­age ac­counts. Re­tire­ment ac­counts and non­profit ac­counts are not taxed on in­vest­ment gains and thus do not get any benefit from higher tax effi­ciency.

Once cash is moved into a bro­ker­age ac­count, it can be used to buy mu­tual funds and ETFs. Funds are iden­ti­fied by a unique se­ries of let­ters known as a “ticker sym­bol.” For ex­am­ple, the largest ETF in the world tracks the S&P 500 stock in­dex and has the ticker sym­bol SPY.

Mov­ing money in and out of a fund in­volves buy­ing or sel­l­ing one or more “shares” of a fund. As with stocks, one share of a fund rep­re­sents a frac­tional piece of own­er­ship of that fund. Each share has a cer­tain dol­lar value which rep­re­sents the amount that is be­ing added or re­moved from the fund for each share that is bought or sold.

Once shares are sold, the cash value of those shares is trans­ferred into the bro­ker­age ac­count’s cash bal­ance. Funds can be eas­ily elec­tron­i­cally trans­ferred from a bro­ker­age ac­count to a bank ac­count. The pro­cess of sel­l­ing a fund and trans­fer­ring money from a bro­ker­age ac­count to a bank ac­count takes ap­prox­i­mately 2–4 busi­ness days from start to finish. There is no up­per limit on the num­ber of with­drawals or the dol­lar amount of any with­drawal.

The fol­low­ing two in­vest­ment recom­men­da­tions are listed in or­der of in­creas­ing risk. All recom­men­da­tions are much safer than tra­di­tional in­vest­ments like stocks and bonds.

Money Mar­ket Funds

Money mar­ket funds are a type of mu­tual fund that in­vest in in­vest­ments that are so safe they are known as cash equiv­a­lents. Money mar­ket funds have spe­cial rules and reg­u­la­tions that en­able them to main­tain a con­stant share price of $1 ex­cept in ex­tremely rare cir­cum­stances when the un­der­ly­ing cash equiv­a­lents change sub­stan­tially in value.

There are two types of money mar­ket funds: money mar­ket funds that only in­vest in U.S. gov­ern­ment debt (known as gov­ern­ment, fed­eral, or trea­sury funds), and money mar­ket funds that can in­vest in differ­ent types of cash equiv­a­lents in­clud­ing very safe bank and cor­po­rate debt (known as prime funds).

All U.S. gov­ern­ment money mar­ket funds main­tain a $1 share price and are con­sid­ered as safe as cash. Re­cent reg­u­la­tions that came into effect in 2016 split prime money mar­ket funds into “re­tail” and “in­sti­tu­tional” funds. Re­tail prime money mar­ket funds main­tain a $1 share price like U.S. gov­ern­ment money mar­ket funds while in­sti­tu­tional prime money mar­ket funds must have their share price vary ac­cord­ing to the ex­act value of their un­der­ly­ing cash equiv­a­lents. Although this change had lit­tle effect on the un­der­ly­ing risk of prime money mar­ket funds, or­ga­ni­za­tions with­drew over $1 trillion out of the to­tal $1.4 trillion in cash held in prime money mar­ket funds in 2016. See Ap­pendix A for a com­par­i­son of the risk of bank ac­counts and money mar­ket funds.

For in­di­vi­d­u­als, we recom­mend the Van­guard Prime Money Mar­ket Fund (VMMXX is the $3,000 min­i­mum ver­sion and VMRXX is the $5 mil­lion min­i­mum ver­sion) due to its ~2.5% yield, low ex­pense ra­tio, and ex­cel­lent man­age­ment record.

For or­ga­ni­za­tions that want a higher yield and are will­ing to ac­cept the gen­er­ally un­no­tice­able fluc­tu­a­tions in ac­count value that are char­ac­ter­is­tic of in­sti­tu­tional prime money mar­ket funds, we recom­mend the In­vesco Liquid As­sets Port­fo­lio (LAPXX) which has a ~2.5% yield, low ex­pense ra­tio, and in­cred­ibly low $1,000 min­i­mum. In­di­vi­d­ual EAs that want to gain a po­ten­tially marginally higher yield than the Van­guard Prime Money Mar­ket Fund can also in­vest in this op­tion.

Ul­tra-Short-Term Bonds

Ul­tra-short-term bonds rep­re­sent the next level of risk above money mar­ket funds. They have higher yields and higher down­ward fluc­tu­a­tions in value which are un­likely to ex­ceed 1%–2% from peak to trough.

We recom­mend the JPMor­gan Ul­tra-Short In­come ETF (JPST) due to its ~2.9% yield, su­pe­rior perfor­mance com­pared to peers like MINT (the in­dus­try leader and an­other strong op­tion), and low ex­pense ra­tio.

Conclusion

Mov­ing cash that is not planned to be spent in the next X weeks from a low-in­ter­est ac­count to a high-yield al­ter­na­tive is an op­ti­mal de­ci­sion in nearly all cir­cum­stances. Higher-yield­ing al­ter­na­tives like a high-yield sav­ings ac­count or StoneCas­tle’s FDIC-in­sured cash man­age­ment solu­tion have equiv­a­lent or su­pe­rior safety com­pared to a stan­dard bank ac­count. Peo­ple and or­ga­ni­za­tions should trans­fer their low-in­ter­est funds to the high­est-yield­ing al­ter­na­tive that is at or be­low their de­sired risk level.

Gen­er­ally, the longer the pe­riod cash will be held, the higher the like­li­hood higher-EV (ex­pected value) op­tions with higher risk like ul­tra-short-term bonds will end the pe­riod with pos­i­tive re­turns. We recom­mend higher EV in­vest­ment op­tions for sav­ings where sig­nifi­cant fluc­tu­a­tions in value are ac­cept­able, such as sav­ings in­tended to be spent years into the fu­ture. We have in­cluded sug­ges­tions for how to im­ple­ment in­vest­ment op­tions that have higher ex­pected re­turns than the low-risk op­tions men­tioned in this ar­ti­cle in Ap­pendix B.

Anti­grav­ity In­vest­ments is a so­cial im­pact–fo­cused or­ga­ni­za­tion. We do not gen­er­ate any rev­enue from recom­mend­ing any of the higher yield­ing cash al­ter­na­tives in this ar­ti­cle, in­clud­ing StoneCas­tle’s. We provide all ad­vis­ing to EAs for free. We typ­i­cally charge a (be­low-mar­ket) rate for pro­vid­ing as­set man­age­ment ser­vices due to the time and cost as­so­ci­ated with do­ing so.

We track the im­pact of our recom­men­da­tions to im­prove our im­pact—if you have im­ple­mented a change based on this ar­ti­cle please email us at sup­port@anti­grav­i­ty­in­vest­ments.com. Thanks!

Ap­pendix A: Back-Of-The-En­velope Risk Anal­y­sis of Bank Ac­counts and Money Mar­ket Funds

Ac­cord­ing to the FDIC, from Oc­to­ber 2000 to Fe­bru­ary 2019, 555 banks failed. In Q1 2000 there were 8,177 banks in the U.S. and in Q3 2018 there were 4,746 banks ac­cord­ing to the Fed­eral Re­serve Bank of St. Louis. As­sum­ing an av­er­age of 6461 banks dur­ing this pe­riod, the an­nual risk of a ran­domly se­lected bank failing is roughly (555/​6461) * (1/​18) = ~0.48% which is around 1 in 200. Of course, ma­jor banks are less likely to fail than av­er­age, so we’d ex­pect their yearly odds of failure to be less than 1 in 200. The FDIC-in­sured por­tion of funds held at failed banks did not ex­pe­rience any losses. Since 2008, the FDIC has pro­tected non-in­sured de­posits in 94.1% of cases. Us­ing that pro­tec­tion rate, the an­nual risk of los­ing money at a ran­domly se­lected bank is (555/​6461) * (1/​18) * (6/​100) = ~0.028% which is around 1 in 3500.

Depend­ing on the defi­ni­tion of a money mar­ket fund, over the last 48 years there have only been 1–3 cases in which a money mar­ket fund has dropped be­low a $1 share price, with no drop ex­ceed­ing 6%. As­sum­ing an av­er­age of 400 money mar­ket funds over the last 48 years (this figure is based on re­cent counts be­cause SEC statis­tics on the num­ber of money mar­ket funds do not ap­pear to go fur­ther back than 2014), the an­nual risk of a ran­domly se­lected money mar­ket fund drop­ping in value is (3/​400) * (1/​48) = ~0.0156% which is around 1 in 6400. Like with banks, large, well-man­aged money mar­ket funds seem less sus­cep­ti­ble to losses.

More money mar­ket funds may have his­tor­i­cally ex­pe­rienced losses if their par­ent or­ga­ni­za­tions or the U.S. gov­ern­ment did not step in. New SEC reg­u­la­tions came into effect in 2016 with the aim of pre­vent­ing is­sues that caused pre­vi­ous money mar­ket fund losses or near losses. Similarly, banks may have also ex­pe­rienced higher failure rates with­out U.S. gov­ern­ment mea­sures in the 2008 fi­nan­cial crisis, and post-2008 leg­is­la­tion also aims to re­duce risks in the bank­ing sys­tem.

His­tor­i­cally, only prime money mar­ket funds have ex­pe­rienced prob­lems be­cause they hold marginally riskier as­sets than U.S. gov­ern­ment bonds to se­cure a higher yield. Be­cause of this, we view U.S. gov­ern­ment money mar­ket funds as equiv­a­lent to cash, and gen­er­ally recom­mend them over sav­ings ac­counts if their yield is higher. We view prime money mar­ket funds as close to cash with a minute pos­si­bil­ity of loss and any losses be­ing so limited in size that they are very un­likely to sig­nifi­cantly im­pact an in­di­vi­d­ual or or­ga­ni­za­tion. In­sti­tu­tional money mar­ket funds ex­pe­rience minute fluc­tu­a­tions in value and new reg­u­la­tions per­mit tem­po­rary with­drawal limits to en­sure liquidity. We be­lieve these as­pects of in­sti­tu­tional funds are also un­likely to im­pact or­ga­ni­za­tional op­er­a­tions. We are neu­tral on hold­ing in­sti­tu­tional prime money mar­ket funds and higher-yield­ing, higher-risk op­tions like ul­tra-short-term bonds; such in­vest­ment de­ci­sions de­pend on the risk tol­er­ance of the in­vestor.

Ap­pendix B: Recom­men­da­tions for Higher EV In­vest­ment Options

This ar­ti­cle went to great lengths to cover bro­ker­age ac­counts and in­vest­ment funds. It felt in­com­plete to in­clude this com­pre­hen­sive back­ground in­for­ma­tion and not in­clude in­for­ma­tion on how to use bro­ker­age ac­counts and in­vest­ment funds to se­lect in­vest­ments with higher ex­pected re­turns.

Assess­ment of Robo-Advisors

On­line in­vest­ment ad­vi­sors have boomed in pop­u­lar­ity. Robo-ad­vi­sors are es­sen­tially bro­ker­age ac­counts that au­to­mat­i­cally choose in­vest­ment funds for in­vestors. They en­able peo­ple to in­vest effec­tively with­out need­ing to have any prior knowl­edge or spend any time man­ag­ing in­vest­ments.

Robo-ad­vi­sors are par­tic­u­larly suit­able for in­di­vi­d­ual in­vestors be­cause they perform op­ti­miza­tions that many in­di­vi­d­ual in­vestors do not perform like tax-loss har­vest­ing, as­set lo­ca­tion, and re­bal­anc­ing. Un­for­tu­nately for in­di­vi­d­ual EAs, robo-ad­vi­sors only seem to have limited sup­port for donat­ing in­vest­ment funds that have gone up in value, which is one of the best ways to donate be­cause of the sub­stan­tial tax sav­ings of this ap­proach. Bet­ter­ment has a low 0.25% fee and sup­ports dona­tions to the Against Malaria Foun­da­tion and GiveWell. Bet­ter­ment did not re­spond to an in­quiry re­gard­ing how easy it is to re­quest new char­i­ties by the time of this ar­ti­cle’s pub­li­ca­tion. WealthSim­ple has a higher 0.5% fee and sup­ports dona­tions to any U.S. char­ity with a more man­ual pro­cess.

There are no robo-ad­vi­sors for non­prof­its we are aware of. Our firm could be clas­sified as a robo-ad­vi­sor for non­prof­its be­cause we op­er­ate digi­tally and charge very low fees, al­though to date we have always di­rectly com­mu­ni­cated with clients in­stead of us­ing a web­site as the sole means of client com­mu­ni­ca­tion.

For in­di­vi­d­u­als, we ex­pect the DIY in­vest­ment ap­proach we cover next to out­perform robo-ad­vi­sors due to an­nual fee sav­ings. We recom­mend us­ing a robo-ad­vi­sor over not in­vest­ing or de­lay­ing the de­ci­sion to be­gin in­vest­ing for a sig­nifi­cant pe­riod of time. Funds can be trans­ferred out of a robo-ad­vi­sor to a self-man­aged bro­ker­age ac­count at any time.

DIY Investing

All a robo-ad­vi­sor is do­ing is se­lect­ing in­vest­ment funds and al­lo­cat­ing money be­tween them, a pro­cess that only takes sev­eral hours a year once some­one is fa­mil­iar with how in­vest­ing works.

For in­di­vi­d­ual EAs that are not fa­mil­iar with in­vest­ing, for re­tire­ment ac­counts, we recom­mend se­lect­ing an ap­pro­pri­ate Van­guard Tar­get Re­tire­ment Fund or Van­guard LifeS­trat­egy Fund. Tar­get Re­tire­ment funds change their hold­ings to suit var­i­ous re­tire­ment dates, and LifeS­trat­egy funds hold in­vest­ments that match var­i­ous risk lev­els. Th­ese Van­guard funds have a 0% man­age­ment fee (any stated fees for these funds rep­re­sent the fees of the un­der­ly­ing funds).

Van­guard Tar­get Re­tire­ment and LifeS­trat­egy funds can also be used in non-re­tire­ment (tax­able) ac­counts, al­though they may re­sult in higher taxes on in­vest­ment gains due to the lack of tax-loss har­vest­ing. We recom­mend us­ing a sim­ple di­ver­sified port­fo­lio with low-cost ETFs and mu­tual funds at least for tax­able ac­counts. In­di­vi­d­u­als can se­lect an as­set al­lo­ca­tion that cor­re­sponds with their perfor­mance ob­jec­tives and risk tol­er­ance and should uti­lize the tech­niques of donat­ing ap­pre­ci­ated se­cu­ri­ties, tax-loss har­vest­ing, as­set lo­ca­tion, and re­bal­anc­ing. We have linked to the Bogle­heads wiki which is a rep­utable source of in­for­ma­tion on low-cost DIY in­vest­ing.

Non­prof­its can in­vest with­out taxes. As such, donat­ing ap­pre­ci­ated se­cu­ri­ties, tax-loss har­vest­ing, and as­set lo­ca­tion do not ap­ply, and the Van­guard funds men­tioned above au­to­mat­i­cally re­bal­ance their un­der­ly­ing funds. Since or­ga­ni­za­tions typ­i­cally in­vest ac­cord­ing to a cer­tain level of de­sired risk and re­turns, Van­guard LifeS­trat­egy Funds are quite suit­able for char­i­ties.

Ad­vanced Investing

The 80,000’s Hours ar­ti­cle ti­tled Com­mon in­vest­ing mis­takes in the effec­tive al­tru­ism com­mu­nity refer­ences sev­eral ev­i­dence-based in­vest­ing tech­niques in­clud­ing fac­tor in­vest­ing and rules-based ac­tive as­set al­lo­ca­tion. We be­lieve there are ev­i­dence-based in­vest­ing tech­niques like the ones refer­enced in the ar­ti­cle that may be able to in­crease in­vest­ment re­turns be­yond a stan­dard ap­proach. Th­ese tech­niques some­times have bar­ri­ers to en­try, for in­stance re­quiring con­tinual mon­i­tor­ing of the mar­ket, ac­cess to fi­nan­cial data, and even cod­ing to run math­e­mat­i­cal calcu­la­tions to de­ter­mine what in­vest­ment de­ci­sions to make. They can also work poorly for in­di­vi­d­u­als be­cause some tech­niques in­volve in­cur­ring a lot of taxes which can re­duce af­ter-tax re­turns be­low the re­turns of a stan­dard ap­proach.

One of the benefits of non­profit in­vest­ing we ex­ploit is that non­prof­its do not in­cur taxes when in­vest­ing, en­abling ad­vanced in­vest­ing strate­gies to work more effec­tively. We be­lieve there is the po­ten­tial for er­ror when at­tempt­ing to in­de­pen­dently pur­sue more ad­vanced ap­proaches with­out a high level of in­vest­ment ex­per­tise. In­ter­ested read­ers are wel­come to read Com­mon in­vest­ing mis­takes in the effec­tive al­tru­ism com­mu­nity as a jump­ing-off point to ex­plore more ad­vanced in­vest­ment ap­proaches.