Thanks for writing this article. I think you are spot on that many non-profit and for-profit organisations do not manage cash effectively.
A few comments:
The 2.16% doesnât seem to me like a lower bound on interest if itâs in a bank account. If you invest in bonds, even short-term, you are exposed to capital fluctuations, so while itâs probably a good idea, itâs not a like-for-like comparison
The 5.51% return is unlikely going forwards. The last 20 years has seen unprecedented use of QE and a lowering & flattening of yield curves. I would assume equities return 5% p.a. and investment grade bonds 1% p.a. in real terms. The lowering of interest rates means (1) asset prices go up (so historical returns look better) and (2) future return expectations go down (across all assets)
Is GiveWellâs year end 31st Dec? The cash balance may be artificially higher at that point due to large number of donations in December
For point 1, I mention this in more detail in my response to GMcGowanâthe 2.16% federal funds rate in 2019 was in fact a conservative estimate for bank yields. That can be seen by looking at my EA Forum article from 2019 which references bank savings yields of up to 2.4%. The accounts that offer a higher rate of interest (like the 2.4% accounts) do not fluctuate like bonds and have identical risk to other savings accounts because theyâre all insured by the FDIC. They yield less in 2020, of course. I perform a more in-depth risk analysis of savings accounts and alternative options in my article from 2019.
Regarding point 2, if we include 2% estimated inflation, then bonds would return 1% and a low-interest charity savings account would return â2%. If we adjust your estimates upwards to include inflation like my 5.51% figure, so 7% for equities and 3% for bonds, we get 3.8% (likely higher, say 4%, with rebalancing). Would you say thatâs within the same ballpark? Regardless, I think future returns are very difficult to forecast, even with good causal explanations. With those assumptions, it would make sense to allocate more of the portfolio to stocks instead.
Regarding point 3, yep, thatâs a shortcoming of solely relying on Form 990 data. If we had the full data, I think itâs unlikely that would change the numbers by that much (say more than 50% higher or lower). I talk about this and other estimation issues in the âEstimation Methodology Caveatsâ section of the article.
Thanks for writing this article. I think you are spot on that many non-profit and for-profit organisations do not manage cash effectively.
A few comments:
The 2.16% doesnât seem to me like a lower bound on interest if itâs in a bank account. If you invest in bonds, even short-term, you are exposed to capital fluctuations, so while itâs probably a good idea, itâs not a like-for-like comparison
The 5.51% return is unlikely going forwards. The last 20 years has seen unprecedented use of QE and a lowering & flattening of yield curves. I would assume equities return 5% p.a. and investment grade bonds 1% p.a. in real terms. The lowering of interest rates means (1) asset prices go up (so historical returns look better) and (2) future return expectations go down (across all assets)
Is GiveWellâs year end 31st Dec? The cash balance may be artificially higher at that point due to large number of donations in December
Thanks for sharing your thoughts!
For point 1, I mention this in more detail in my response to GMcGowanâthe 2.16% federal funds rate in 2019 was in fact a conservative estimate for bank yields. That can be seen by looking at my EA Forum article from 2019 which references bank savings yields of up to 2.4%. The accounts that offer a higher rate of interest (like the 2.4% accounts) do not fluctuate like bonds and have identical risk to other savings accounts because theyâre all insured by the FDIC. They yield less in 2020, of course. I perform a more in-depth risk analysis of savings accounts and alternative options in my article from 2019.
Regarding point 2, if we include 2% estimated inflation, then bonds would return 1% and a low-interest charity savings account would return â2%. If we adjust your estimates upwards to include inflation like my 5.51% figure, so 7% for equities and 3% for bonds, we get 3.8% (likely higher, say 4%, with rebalancing). Would you say thatâs within the same ballpark? Regardless, I think future returns are very difficult to forecast, even with good causal explanations. With those assumptions, it would make sense to allocate more of the portfolio to stocks instead.
Regarding point 3, yep, thatâs a shortcoming of solely relying on Form 990 data. If we had the full data, I think itâs unlikely that would change the numbers by that much (say more than 50% higher or lower). I talk about this and other estimation issues in the âEstimation Methodology Caveatsâ section of the article.