For the same of illustration, let’s say the global economic growth rate is 3%, the return on business equity is 5%, and the internal rate of compounding of, say, cash transfers is 20% in the first year, 18% in the second, then 16%, 14%, 12%, 10%, 8%, 6%, 4%, and then 3% thereafter. Holding all else constant, how long would the ‘invest and give later’ strategy take to catch up?...40 years
It looks like you’re comparing giving now to investing (but never giving), not investing and giving later. The latter requires specifying when the ‘giving later’ happens.
With your figures you get 8 years before donation returns fall below business equity’s 5% rate. So saving for one year, then donating, will come out ahead of donating now on a 9 year time scale, not a 40 year time scale.
So the graph and ’40 years’ don’t match up with ‘invest and give later’ rather than ‘invest and give never.’
They still mislead about how long it takes for a ‘invest and then donate’ strategy to beat ‘donate now. As I said above, with your numbers invest and donate can win in 9 years, not 40. The problem is that ‘invest and then donate’ corresponds to many different strategies for different donation dates. If you completely ignore the benefits after year X, then waiting to donate in year X will look bad because the rapid post-donation compounding is pushed out of the window you’re looking at (like gaming the CBO 10 year window in U.S. budget fights).
The strategy (for your figures) that maximizes returns with a horizon of X years, where X is 9 or greater, is to save and invest, the donate 8 years before X, so that you get the last year of above 5% returns in year X:
s 20% in the first year, 18% in the second, then 16%, 14%, 12%, 10%, 8%, 6%, 4%, and then 3%
You should add that curve (size of impact in year X, donating 8 years before X) to your graph, which would pass ‘donate now’ at 9 years and then go substantially above it at 40 years.
It looks like you’re comparing giving now to investing (but never giving), not investing and giving later. The latter requires specifying when the ‘giving later’ happens.
With your figures you get 8 years before donation returns fall below business equity’s 5% rate. So saving for one year, then donating, will come out ahead of donating now on a 9 year time scale, not a 40 year time scale.
So the graph and ’40 years’ don’t match up with ‘invest and give later’ rather than ‘invest and give never.’
Do the new labels fix this for you?
They still mislead about how long it takes for a ‘invest and then donate’ strategy to beat ‘donate now. As I said above, with your numbers invest and donate can win in 9 years, not 40. The problem is that ‘invest and then donate’ corresponds to many different strategies for different donation dates. If you completely ignore the benefits after year X, then waiting to donate in year X will look bad because the rapid post-donation compounding is pushed out of the window you’re looking at (like gaming the CBO 10 year window in U.S. budget fights).
The strategy (for your figures) that maximizes returns with a horizon of X years, where X is 9 or greater, is to save and invest, the donate 8 years before X, so that you get the last year of above 5% returns in year X:
You should add that curve (size of impact in year X, donating 8 years before X) to your graph, which would pass ‘donate now’ at 9 years and then go substantially above it at 40 years.
Robert, your charts are great. Adding one that compares “give in year 0” with “give in year 1″ would illustrate Carl’s point.