# Summary

There have been a few dis­cus­sions in the EA com­mu­nity about the mer­its of donat­ing now ver­sus in­vest­ing and donat­ing later. I think it is a very valuable ques­tion to an­swer, but I be­lieve some have used flawed logic to con­clude that we should donate later. In this ar­ti­cle, I make the case against de­lay­ing de­ploy­ment of funds to the dis­tant fu­ture. I also sug­gest a novel ap­proach, which I call Key­ne­sian Altru­ism, that in­volves donat­ing dur­ing global eco­nomic down­turns to max­imise im­pact when re­turns from in­vest­ment are at their low­est. Us­ing this logic, I con­clude that now (Au­gust 2020) is a good time to be de­ploy­ing (i.e. spend­ing) funds.

# Background

I iden­tify as an effec­tive al­tru­ist and have earned-to-give for many years. I have stud­ied ad­vanced fi­nance at a lead­ing uni­ver­sity and work in the as­set man­age­ment in­dus­try. All views are my own and un­re­lated to my em­ploy­ment.

In this piece, I have as­sumed a ba­sic level of fi­nance, statis­tics and eco­nomics knowl­edge. I have tried to be fo­cused, con­cise and read­able rather than ex­haus­tive, rigor­ous and aca­demic. I have also tried to avoid du­pli­cat­ing the con­tents of the ar­ti­cles to which I re­fer.

# In­vest to Give

A num­ber of peo­ple have writ­ten some very thought-pro­vok­ing ar­ti­cles ask­ing whether we should in­vest money now and give at a later point:

The case for in­vest­ing later
RPTP Is a Strong Rea­son to Con­sider Giv­ing Later
Giv­ing now vs. later

The logic made in these ar­ti­cle es­sen­tially goes as fol­lows:

1) You can make pos­i­tive in­fla­tion-ad­justed re­turns by in­vest­ing in equities;
2) On av­er­age the amount of money you will have in x years will be higher in real terms than you have to­day;
3) By de­ploy­ing the money later, you will be able to buy more.

The pro­po­nents of this are very up­front about one-tail risks:

1) An ex­is­ten­tial event could cause com­plete loss;
2) The val­ues of the fund may drift over time (my favourite ex­am­ple is the Com­mu­nist Party of Great Bri­tain, which dis­banded in 1991 and be­came Demo­cratic Left then New Poli­tics Net­work then Un­lock Democ­racy in 2007, hence within 16 years, the cause had changed from com­mu­nism to ad­vo­cacy for par­ti­ci­pa­tory democ­racy through a writ­ten con­sti­tu­tion);
3) There are diminish­ing re­turns on de­ploy­ment of cap­i­tal and it is likely that EA will have more re­sources in the fu­ture;
4) We may (or may not) be liv­ing at the most in­fluen­tial time in his­tory.

Th­ese are very well thought-through con­sid­er­a­tions that I broadly agree with.

The first is­sue I have with this is that it treats in­vest­ments in equity as if they are risk-free. When you in­vest in equities, the­ory (CAPM) tells us we get paid two com­po­nents: (1) a risk-free re­turn + (2) a pre­mium for beta. Com­po­nent one, the risk-free re­turn, is es­sen­tially com­pen­sat­ing you for time. This is some­times pos­i­tive in real-terms and some­times nega­tive in real-terms. In short, if you in­vest in su­per low-risk in­vest­ments (e.g. Trea­suries), you may or may not have more money in x years in real-terms. Based on data up to 2011 com­piled by Robert Shiller, the real risk-free rate of re­turn has av­er­aged −0.2% over the last 5 years (ge­o­met­ric mean), −0.1% over 10 years, +1.2% over 20 years, +1.9% over 50 years and +1.2% last 100 years, so typ­i­cally more of­ten pos­i­tive than nega­tive, but re­cently more of­ten nega­tive than pos­i­tive.

Com­po­nent two, the pre­mium for beta, is es­sen­tially say­ing that you get paid for tak­ing on risk that the mar­ket can­not di­ver­sify away, and this com­po­nent should be ig­nored be­cause it is a re­turn you get for sel­l­ing risk not sel­l­ing time prefer­ence. There is a mar­ket for risk, just like any mar­ket for goods. You can sell risk (get paid to take it on) or buy risk (pay some­one to take it off you). Like all mar­kets, there is an equil­ibrium at which the mar­ket clears and this de­ter­mines the price (for the fi­nance the­o­rists out there, this is the mar­ket risk pre­mium mul­ti­plied by the for­ward volatility). When you buy equities, you are be­ing com­pen­sated for tak­ing on risk that can’t be di­ver­sified away. Essen­tially some­one is will­ing to pay you around 5% (the mar­ket risk pre­mium, with beta=1) to put your money through a prob­a­bil­ity func­tion that spits out a roughly nor­mal dis­tri­bu­tion with a stan­dard de­vi­a­tion of 20% (the long-run nor­mal level of the VIX). There is real eco­nomic value in min­imis­ing risk and real eco­nomic value to have in­vest­ments that hedge you (i.e. hav­ing more money when the econ­omy is weak and you need it); that’s why peo­ple are will­ing to pay for it. When you in­vest with lev­er­age, you are just sel­l­ing more risk. Be­cause, at least in the­ory, you could get the re­turn in a very short pe­riod of time and still get com­pen­sated for it, i.e. high lev­er­age, short du­ra­tion, this re­turn is not driven by pa­tience. If I short sell a AAA gov­ern­ment bond with ma­tu­rity of 1 year and use the cash to buy a 1-year for­ward on a stock or com­mod­ity, I will ex­pect to make on av­er­age 5% of the no­tional cap­i­tal at work, but (sub­ject to no coun­ter­party risk) I don’t need to in­vest any money at all. On one day in a year’s time, I will re­ceive an un­cer­tain amount of money and have to pay a cer­tain amount of money, which will be ei­ther an in­finite per-an­num gain or an in­finite per-an­num loss if you in­sist on think­ing about risky re­turns on an an­nu­al­ised ba­sis. I’m not say­ing don’t in­vest in equities (for what it’s worth, I think EAs should in­vest in high-beta port­fo­lios), but I am say­ing it’s not a like-for-like com­par­i­son.

The sec­ond is­sue I have is that the ba­sis for it as­sumes in­fla­tion as a baseline. How­ever, the cost of a product or ser­vice does not in­crease at the same rate as the cost to make some­body bet­ter-off, i.e. peo­ple in the fu­ture are likely to be wealthier so giv­ing them the same amount of money (cash pro­gram­ming) or stuff (e.g. malaria nets) will be less im­pact­ful in the fu­ture. This differ­ence is real GDP growth. Given the choice of de­ploy­ing 10 malaria nets to­day or 11 malaria nets in 100 years’ time, I would definitely choose the former. In 100 years’ I hope and ex­pect that ev­ery­one in the world can af­ford a malaria net and our philan­thropy is tar­get­ing needs higher up the hi­er­ar­chy. Even if sci­en­tific de­vel­op­ment means we have a malaria net that is twice as effec­tive, I would still rather de­ploy 10 to­day. His­tor­i­cally, global real GDP growth has been at least 3% p.a. (and over the long run, lower in­come coun­tries tend to be above that due to eco­nomic con­ver­gence). If your in­vest­ments are not grow­ing at greater than 3% p.a., then your out­comes will be shrink­ing even if your out­puts are grow­ing.

The third is­sue is that the re­turn (in nom­i­nal terms) may be taxed or ex­pro­pri­ated. If an in­di­vi­d­ual de­lays dona­tions, any gains will be part of their per­sonal tax­able in­come /​ cap­i­tal gains. While char­i­ties nor­mally have some tax effi­cient ad­van­tages, they are not ex­empt from all tax. For ex­am­ple, un­til 2016 in the UK char­i­ties had to pay tax on div­i­dends but not cap­i­tal gains. Of course, if do­ing at large scale, it would likely be pos­si­ble to choose an offshore tax domi­cile, but this may also in­crease the risk of ex­pro­pri­a­tion. It’s also worth not­ing here that for char­i­ties in the UK to main­tain a level of cap­i­tal above what can be jus­tified as re­serves, they need ex­press per­mis­sion in their deed of trust, as this would be con­sid­ered an en­dow­ment. Even then, the origi­nal cap­i­tal amount must be spent within 21 years to stay within the law.

In con­clu­sion, it is more ap­pro­pri­ate to com­pare the risk-free rate (typ­i­cally −1% to 2% p.a. in real terms) with GDP growth (typ­i­cally 3% p.a. in real terms), rather than com­par­ing equity re­turns (typ­i­cally 5% to 7% p.a. in real terms) with in­fla­tion (by defi­ni­tion 0% in real terms). That is even be­fore you get into com­pli­ca­tions of im­ple­ment­ing this strat­egy in prac­tice: tax, ex­pro­pri­a­tion risk, char­ity law, ex­is­ten­tial risk, value drift, diminish­ing re­turns and po­ten­tially diminish­ing in­fluence.

# Key­ne­sian Altruism

While I dis­agree with de­lay­ing de­ploy­ment of funds to the dis­tant fu­ture, that’s not to say I in­sist on ev­ery­thing be­ing spent now. There are short pe­ri­ods of time when the num­bers can make it worth de­lay­ing de­ploy­ment. This is due to eco­nomic cy­cles.

Ba­sic macroe­co­nomics tells us there are times when the econ­omy is work­ing faster than it should (over­heated) and times when the econ­omy is work­ing slower than it should (usu­ally defined as a re­ces­sion). There is a lot of pos­i­tive feed­back in the econ­omy; when de­mand for stuff is high, busi­nesses make record prof­its, em­ploy­ees get paid well to re­tain them and cap­i­tal is needed for growth. Dur­ing a re­ces­sion, the op­po­site hap­pens and spend­ing on ad­ver­tis­ing, cap­i­tal equip­ment and R&D of­ten falls.

Most gov­ern­ments do their best to re­duce the mag­ni­tude (i.e. differ­ence be­tween peak and trough) of cycli­cal­ity through mon­e­tary policy. This in­volves low­er­ing in­ter­est rates, which re­duces the re­turn you get from in­vest­ing (this in­creases as­set prices and ex­plains why the S&P 500 is up year-to-date de­spite the worst pan­demic in 100 years) and en­courag­ing you to spend it in­stead. Essen­tially gov­ern­ments are sub­si­dis­ing spend­ing be­cause not enough peo­ple are do­ing it.

Another tool gov­ern­ments have in a re­ces­sion is fis­cal policy. This ba­si­cally means they them­selves are spend­ing to fill the gap. Ar­guably if you are go­ing to build long-term in­fras­truc­ture as­sets (pre­vi­ously high­ways, now fibre op­tic), the best time is when lots of peo­ple are un­em­ployed, so tal­ented peo­ple are delighted to work for less than it would have cost to em­ploy them pre­vi­ously. How­ever, gov­ern­ments them­selves are also faced with a re­duc­tion in in­come (less tax due to lower prof­its /​ in­comes) and an in­creased in ex­pen­di­ture (more un­em­ploy­ment so more so­cial se­cu­rity pay­ments). This means if they are to boost spend­ing dur­ing a re­ces­sion, they need to be happy to run a deficit and need to be self-dis­ci­plined enough to run a sur­plus dur­ing good times. This sort of fis­cal policy is known as Key­ne­sian Eco­nomics. In my ex­pe­rience most gov­ern­ments do it to some ex­tent, but few do it prop­erly.

So what about the third sec­tor. Just like their pri­vate and pub­lic sec­tor peers, in­come for char­i­ties also typ­i­cally falls in a re­ces­sion. Char­i­ties are already mak­ing re­dun­dan­cies as a re­sult of COVID-19, even though iron­i­cally their ser­vices are more re­quired than ever now. There is also a struc­tural cost to re­duce a work­force: re­dun­dancy costs; other costs of re­struc­tur­ing (e.g. ad­just­ing office space); then hiring and train­ing new peo­ple when you re­turn to growth. I be­lieve that not only should char­i­ties /​ foun­da­tions run at a deficit dur­ing a re­ces­sion (like a smart gov­ern­ment), they should even con­sider grow­ing to meet the in­creased need of their benefi­cia­ries. I call this Key­ne­sian Altru­ism.

From a prac­ti­cal per­spec­tive though, this takes guts for a char­ity to do as it means run­ning ‘un­sus­tain­ably’ (as in ex­pen­di­ture ex­ceeds in­come) some­times for a pe­riod of up to 5 years. It also re­quires plan­ning in ad­vance: char­i­ties don’t nor­mally have the re­serve lev­els they need to do this (and as I men­tioned above, char­ity law ac­tively pre­vents it). The onus of­ten falls on the donors, but they can be equally bad. Many en­dow­ments de­ploy the in­come they re­ceive from in­vest­ment in­come, which of course falls dur­ing a re­ces­sion. I dis­agree with this ap­proach. In my view, now is a very good time to re­duce the size of an en­dow­ment. For in­di­vi­d­ual donors it is harder, but if you are truly al­tru­is­tic, there is no bet­ter time to donate, even if your job se­cu­rity may be lower to­day than a year ago.

Re­turn­ing to the fi­nan­cial the­ory we dis­cussed in the pre­vi­ous sec­tion, right now the risk-free rate of re­turn is solidly nega­tive (as at 10th Sept 2020, US Trea­suries have a −1.28% yield over 5 years in real terms), but the spend­ing power is higher now than it was last year. The price of im­pact has also likely in­creased be­cause there is now more need for help.

# Fi­nal thoughts

Fi­nally, while most of this ar­ti­cle has fo­cused on a quite com­plex, there are some ba­sic prac­ti­cal steps that I think ev­ery­one can agree upon:

1) Cash sit­ting in a char­ity bank ac­count costs money, so if you have lots of it, in­vest some;
2) Be­ware the ex­tra ad­minis­tra­tive bur­den that comes with man­ag­ing a char­ity with in­vest­ment in­come (some­times it’s bet­ter to have a bank ac­count that pays no in­ter­est than one that pays 0.01% p.a.);
3) Tak­ing time to work out where best to de­ploy funds clearly has value.
• Would ‘coun­ter­cycli­cal al­tru­ism’ also cap­ture this view?

• Yes, I think it would. My only slight hes­i­ta­tion is that it may not be im­me­di­ately ob­vi­ous what cy­cle it refers to. But thank you for the sug­ges­tion.

• This ar­ti­cle seems to be mak­ing two dis­tinct claims:

1. The stan­dard ar­gu­ments for giv­ing later don’t hold up.

2. “Key­ne­sian Altru­ism”: It’s bet­ter to give when the econ­omy is weaker.

I be­lieve these can be true or false in­de­pen­dently. I want to ex­pand a bit on the first claim.

You iden­tify a lot of rele­vant con­cerns that I agree need to be ad­dressed, and that of­ten get ig­nored. I think that even af­ter ad­dress­ing them, giv­ing later may still look bet­ter than giv­ing now.

Are you fa­mil­iar with the Ram­sey equa­tion (e.g., see this SEP en­try)? The Ram­sey equa­tion states that, in an effi­cient mar­ket, where r is the risk-free rate, is the rate of time prefer­ence, is the rate of risk aver­sion, and g is the con­sump­tion (GDP) growth rate. The claim in RPTP Is a Strong Rea­son to Con­sider Giv­ing Later is that most mar­ket ac­tors use a value of that’s too high, which pushes up in­ter­est rates, and there­fore “pa­tient” ac­tors should pre­fer to in­vest. (Right now, it looks like r < g. I don’t know how to ex­plain this. I did a lit­tle bit of read­ing on the mat­ter and my im­pres­sion is economists be­lieve it shouldn’t be true and it’s a bit of a puz­zle as to why it’s true cur­rently, but there are some po­ten­tial ex­pla­na­tions.)

You point out that donors need to worry about taxes and ex­pro­pri­a­tion. That ba­si­cally means . This is true for both al­tru­ists and non-al­tru­ists. But as long as most peo­ple have a pure time prefer­ence and al­tru­ists don’t, al­tru­ists will have a lower than most peo­ple, and there­fore will rel­a­tively fa­vor in­vest­ing. (I made an at­tempt to es­ti­mate the philan­thropic dis­count rate here.)

Another thing you brought up is that most peo­ple don’t in­vest ex­clu­sively in risk-free as­sets. The Ram­sey equa­tion does use the risk-free rate, but there’s an ex­tended ver­sion of the equa­tion that al­lows for risk. The ex­tended Ram­sey equa­tion (taken from here) is where g fol­lows a nor­mal dis­tri­bu­tion with stan­dard de­vi­a­tion , and r and g are perfectly cor­re­lated. When ac­count­ing for risk, the same ba­sic the­o­ret­i­cal ar­gu­ment holds: im­pa­tient ac­tors will push up in­ter­est rates, mak­ing in­vest­ing look more promis­ing to pa­tient ac­tors.

Of course, there’s a case to be made that this the­o­ret­i­cal model doesn’t hold up (e.g., cur­rent risk-free rates seem in­com­pat­i­ble with a pos­i­tive pure time prefer­ence). I haven’t se­ri­ously stud­ied eco­nomics but my im­pres­sion is economists gen­er­ally be­lieve this is a good model.

• Yes, I’m fa­mil­iar with the Ram­sey equa­tion and I think it maps rel­a­tively well to CAPM (real re­turn = real risk-free rate + beta * mar­ket risk pre­mium). δ or real re­turn is high. Re­turn on cap­i­tal typ­i­cally ex­ceeds GDP growth, i.e. if peo­ple are will­ing to in­vest in risky as­sets, they will most likely have more to spend at a later point.

From a per­sonal point of view, iff my util­ity curve is lin­ear (i.e. los­ing 50% of my wealth would have a similar mag­ni­tude of util­ity change as gain­ing 50% ad­di­tional wealth) and I know my date of death, then it would make sense to in­vest for as long as re­turn on cap­i­tal re­mains be­low GDP growth. I would be care­ful about say­ing “most mar­ket ac­tors use a value of δ that’s too high” be­cause I think you can ar­gue what they are do­ing is perfectly ra­tio­nal; if you’re not sure if you’ll reach re­tire­ment, you’ll be less in­clined to con­tribute to a pen­sion (from a purely self­ish point of view). Now we as al­tru­ists don’t have to worry about the date of death be­cause we are helping a pool of peo­ple into the fu­ture, who don’t have to be al­ive to­day. How­ever, we do have to worry about util­ity. To achieve the re­turn on cap­i­tal, we do need to take on risk. In gen­eral, wealthier peo­ple are able to take more risks than poorer peo­ple (util­ity func­tions are more lin­ear at higher wealth). Altru­ists rep­re­sent these poorer peo­ple (this point is more rele­vant to global health and de­vel­op­ment than an­i­mal welfare and long-term fu­ture), so should be sen­si­tive to un­di­ver­sifi­able risks. In other words, I don’t think it’s ob­vi­ous that we should be more pa­tient (I’m talk­ing in gen­eral terms, not about the speci­fics of eco­nomic con­di­tions right now).

You can di­vide δ into (1) r or real risk-free rate and (2) - ηg or (beta * MRP). My sub­jec­tive view is that the risk-free rate is too low and the MRP is too high. I think very few peo­ple think about their in­vest­ments in the right way: “What level of re­turn am I will­ing to ac­cept to com­pen­sate me for volatility with stan­dard de­vi­a­tion of x% (typ­i­cally around 20% for the stock mar­ket)?”. Most peo­ple sub­scribe to: “I’ll do x% equities, y% cor­po­rate bonds and z% gov­ern­ment bonds be­cause that’s what ev­ery­body else is do­ing”. I per­son­ally in­vest 100% in equities for this rea­son. Fur­ther­more, peo­ple are not flex­ible in how they be­have (if you are fa­mil­iar with the IS-LM model, I’m ba­si­cally say­ing IS is steeply nega­tive). In to­day’s in­vest­ment en­vi­ron­ment, ev­ery­one should be spend­ing a lot more (in­clud­ing on char­ity) and sav­ing a lot less, but that’s not how peo­ple be­have in prac­tice. This is the rea­son why the real risk-free rate is so nega­tive at the mo­ment. Either way, the con­se­quence is that you have to ‘pay’ a lot for a risk-free rate. Typ­i­cally your money will grow not too differ­ent from in­fla­tion (and cur­rently less) if you are not pre­pared to take any risk.

Fi­nally, I do think value drift and diminish­ing marginal re­turns are very im­por­tant points. Value drift is ma­jor sim­ply be­cause the world changes so fast. And in terms of diminish­ing marginal re­turns, I think the most im­por­tant thing is that what we do to­day im­pacts the fu­ture. When you de­worm a child, that’s not just an “ex­pense” for benefits in that year, it po­ten­tially im­proves their school perfor­mance and stim­u­lates eco­nomic growth. I pre­fer to think of it as “in­vest­ment”. I think it’s much more im­por­tant to build out a safe frame­work for AI now than try do­ing it in 100 years’ time (even with more re­sources).

• The idea that char­i­ties should fo­cus on spend­ing money dur­ing re­ces­sions be­cause of the ex­tra benefit that pro­vides seems wrong to me.

Us­ing stan­dard es­ti­mates of the fis­cal mul­ti­plier dur­ing re­ces­sions — and ig­nor­ing any offset­ting effects your ac­tions have on fis­cal or mon­e­tary policy — if a US char­ity spends an ex­tra $1 dur­ing a re­ces­sion it might raise US GDP by be­tween$0 and $3. If you’re a char­ity spend­ing$1, and just gen­er­ally rais­ing US GDP by $3 is a sig­nifi­cant frac­tion of your to­tal so­cial im­pact, you must be a very in­effec­tive or­gani­sa­tion. I could not recom­mend giv­ing to such a pro­ject. I’d think such a gain would be swamped like other is­sues like in­vest­ment re­turns, us learn­ing about bet­ter char­i­ties in fu­ture, or the worst prob­lems get­ting solved leav­ing us worse giv­ing op­por­tu­ni­ties, and so on. An ex­cep­tion might be if you in­de­pen­dently thought some­thing like GiveDirectly was the best op­tion and wasn’t go­ing to be beaten by an­other op­tion in fu­ture. Then giv­ing money for dis­per­sal dur­ing a re­ces­sion in the re­cip­i­ent coun­try might be, say, twice as good as giv­ing it out­side of re­ces­sion. There’s a bunch of dis­cus­sion of these is­sues in my in­ter­view with Phil Tram­mell. • Thanks for your com­ment. I’m not ad­vo­cat­ing it be­cause of the fis­cal mul­ti­plier. That would be the cherry on the cake. The first sim­ple step is sim­ply to say don’t cut back ex­pen­di­ture be­cause shrink­ing and re­grow­ing an or­gani­sa­tion is costly. Most char­i­ties (though EA ones are some­what atyp­i­cal) see their in­come re­duced dur­ing bad times. And since most char­i­ties think in bland terms of x months of re­serves, this means their ex­pen­di­ture fluc­tu­ates as well. This is an not effi­cient way to man­age an or­gani­sa­tion. In good times, build a buffer, so you can keep go­ing dur­ing bad times. Just keep­ing ex­pen­di­ture flat would be a ma­jor step in the right di­rec­tion. Of course you can take it a step fur­ther. There is an­other cost ar­gu­ment, which is that it is cheaper to do stuff dur­ing bad times. When un­em­ploy­ment is high, you can get tal­ented peo­ple more eas­ily. So even if the benefits are the same, the benefit/​cost is higher. The fact the benefits may be higher, not just that the fis­cal mul­ti­plier may be higher, but that fulfill­ment of ba­sic hu­man needs may be worse, is a bonus, though it prob­a­bly only ap­plies to Global Health and Devel­op­ment causes. I wouldn’t use a Key­ne­sian al­tru­ism strat­egy sim­ply for this. • Yep that sounds good, non-prof­its should aim to have fairly sta­ble ex­pen­di­ture over the busi­ness cy­cle. I think I was thrown off your true mo­ti­va­tion by the name ‘Key­ne­sian al­tru­ism’. It might be wise to re­name it ‘coun­ter­cycli­cal’ so it doesn’t carry the im­pli­ca­tion that you’re look­ing for an eco­nomic mul­ti­plier. • I won­der if ex­change rates volatility dur­ing global re­ces­sions (usu­ally, the US$ dol­lar and the Euro rise in re­la­tion to na­tional cur­ren­cies in de­vel­op­ing coun­tries) would add an­other point, at least for char­i­ties lo­cated in the de­vel­op­ing world.
(Per­son­ally, since my job is very sta­ble and op­por­tu­ni­ties for in­vest­ments scarce, I have been in­creas­ing my own dona­tions to ac­count for my de­clin­ing con­sump­tion)

• That’s a very in­ter­est­ing point I hadn’t con­sid­ered. Yes, if the ex­pen­di­ture is in emerg­ing mar­kets, your money likely goes even fur­ther dur­ing global recessions

• Thanks for post­ing this, this is very in­ter­est­ing.

Did you by any chance try to mod­els this? It would be in­ter­est­ing for ex­am­ple to com­pare differ­ent strate­gies and how would they work given past data.

• I haven’t. I think the key de­bate is whether the the­ory could work in prac­tice, rather than whether the the­ory holds. In terms of mod­el­ling, I think it would be hard to quan­tify the benefits as the vari­ables (in par­tic­u­lar: (1) the cost of down­siz­ing and then re-scal­ing an or­gani­sa­tion, and (2) change in marginal CPLSE with re­spect to a change in GDP) are in­her­ently difficult to mea­sure. Do you have any thoughts about how we could do it?

• I agree that it isn’t easy to quan­tify all of these.

Here is some­thing you could do, which un­for­tu­nately does not take into ac­count the changes in char­i­ties op­er­a­tion at differ­ent times, but is quite easy to do (all of the figures should be in real terms).

1. Choose a large in­ter­val of time (say 1900 to 2020), and at each point (say ev­ery month or year), de­cide how much you in­vest vs how much you donate, ac­cord­ing to your strat­egy (and oth­ers).

2. Choose a model for how much money you have (for ex­am­ple, start­ing with a fixed amount, or say re­ceiv­ing a fixed amount ev­ery year, or re­ceiv­ing an amount de­pend­ing on the re­turn on in­vest­ment in the pre­vi­ous year).

3. Sum up the to­tal money donated over the course of that in­ter­val, and calcu­late how money you have in the end.

Then, you can com­pare for differ­ent strate­gies the two val­ues at the end. You can also sum the to­tal donated and the money left, pre­tend­ing to donate ev­ery­thing left at the end of the in­ter­val. Or you could ad­just your strate­gies such that no money is left at the end.

1. Cash sit­ting in a char­ity bank ac­count costs money, so if you have lots of it, in­vest some;

But the ob­vi­ous ways to in­vest (i.e. stocks) work poorly when com­bined with coun­ter­cycli­cal spend­ing. Char­i­ties are nor­mally risk-averse about in­vest­ments be­cause they have plenty of money to in­vest when stocks are high, but need to draw down re­serves when stocks are low.

• That’s a good point and I don’t think I was par­tic­u­larly clear in my post. I will have a think about whether I can rephrase in a way that keeps it con­cise.

I’d like to sep­a­rate my re­sponse into two is­sues: (1) liquidity (cash vs. Trea­suries) and (2) risk tol­er­ance (Trea­suries vs. stocks). On liquidity, I think it’s a good idea to keep a few months of ex­pen­di­ture in cash to en­sure you can ac­cess it in an in­stant. Depend­ing on your size, you may get some in­ter­est paid by the bank, but it’s very un­likely to keep pace with in­fla­tion. How­ever, any­thing you don’t need at short no­tice can be in­vested in risk-free as­sets (e.g. short-dated US Trea­suries), which have a bet­ter chance at keep­ing pace with in­fla­tion (with the usual caveat that the benefits have to out­weigh the added ad­min).

Risk tol­er­ance, i.e. whether to in­vest in stocks (maybe even with lev­er­age) rather than Trea­suries, is an­other topic and lots of smart peo­ple have writ­ten pre­vi­ous stuff on this, e.g. here. This is where the prac­ti­cal difficul­ties I men­tion come in. You need to be will­ing for in­come (in­clud­ing po­ten­tial gains and losses on in­vest­ments) and ex­pen­di­ture to be go­ing in op­po­site di­rec­tions, po­ten­tially over a num­ber of years. Cer­tainly, if a char­ity has 6 months’ ex­pen­di­ture in the bank, I wouldn’t recom­mend putting 3 months worth in stocks. But if a char­ity has 10 years’ ex­pen­di­ture in the bank, I think it needs to re­al­ise how much that is cost­ing it. If it puts 9 years’ ex­pen­di­ture in stocks, then with even a bad mar­ket crash, it will still have 5 years’ ex­pen­di­ture.

• 10 years worth of cash sounds pretty un­usual, at least for an EA char­ity.

But part of my point is that when stocks are low, the char­ity won’t have enough of a cush­ion to do any in­vest­ing, so it won’t achieve the kind of re­turns that you’d ex­pect from buy­ing stocks at a no-worse-than-ran­dom time. E.g. I’d ex­pect that a char­ity that tries to buy stocks would have bought around 2000 when the S&P was around 1400, sold some of that in 2003 when the S&P was around 1100 to make up for a short­fall in dona­tions, bought again in 2007 at 1450, then sold again in 2009 at 1100. With pat­terns like that, it’s easy to get nega­tive re­turns.

In­di­vi­d­ual in­vestors of­ten un­der­perform mar­kets for the same rea­son. They can avoid that by in­vest­ing only what they’re sav­ing for re­tire­ment. How­ever, char­i­ties gen­er­ally shouldn’t have any­thing equiv­a­lent to sav­ing for re­tire­ment.

• I think what you are refer­ring to is an Anti-Night­in­gale. If you always sell af­ter a mar­ket crash, you will most likely (as in mode, not mean) have poor re­turns, but that doesn’t change the ex­pected value from in­vest­ing. The odds of a roulette wheel never change, but you can change your strat­egy to give you a >50% chance of com­ing away with a profit. My strat­egy will give you a >50% chance of com­ing away with an un­der­perfor­mance of the mar­ket, but will not change the un­der­ly­ing odds.

Another trap some peo­ple (in­clud­ing pro­fes­sional in­vestors) fall into is “buy­ing the dip”. It feels nat­u­ral to ex­pect that when the mar­ket is low, the fu­ture ex­pec­ta­tions must be higher and it must be a good time to in­vest. In a perfect mar­ket (not a given!) this is not the case. In fact due to gov­ern­ment re­sponses (low­er­ing the in­ter­est rate), re­turns should ac­tu­ally be lower. In very prac­ti­cal terms, this time last year you might have ex­pected a 6% re­turn from in­vest­ing in the S&P 500 for one year. Right now, that 6% might be 5.5% be­cause in­ter­est rates are lower.