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Investing to Give Beginner Advice?

by Rook1 min read17th Jun 202015 comments

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I’ve been convinced by some of the arguments that I should be investing some of the money I'm currently donating for the purpose of donating more later. The main problem with this is that I know very little about investing, and something about (1) the not-very-epistemically-careful investing culture and (2) the oodles and oodles of “investment advice” on the internet makes this quite daunting. Given that the EA community tends to be unusually epistemically careful and some people in it will likely have already sorted through that advice, I figured it could be worthwhile to ask around a bit. Also, hopefully, some of the answers below will also be helpful for other EAs down the line.

There are two categories of advice I’m looking for:

1) General investment advice --> this can be specific tips or links to longer resources that people find valuable, like books, websites, etc. I’m willing to invest a bit of time into research if it’ll potentially give me higher returns on my monetary investment down the road.

2) Specific investing-to-give advice --> E.g. What alternates to giving-now strategies (other than investing) are worth considering for someone that wants to give-later (like donating to an EA-fund)? What sort of splits between giving-now and giving-later are recommended?

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This is a brief response, so please don't rush intemperately into things before understanding what you're doing on the basis of any of this. For general finance information, especially about low-fee index investing, I recommend Bogleheads (the wiki and the forum):

https://www.bogleheads.org/wiki/Main_Page

For altruistic investment, the biggest differentiating factors are 1) maximizing tax benefits of donation; 2) greater willingness to take risks than with personal retirement, suggesting some leverage.

Some tax benefits worth noting in the US:

1) If you purchase multiple securities you can donate those which increase, avoiding capital gains tax, and sell those that decline (tax-loss harvesting), allowing you to cancel out other capital gains tax and deduct up to $3000/yr of ordinary income.

2) You can get a deduction for donating to charity (this is independent of and combines with avoiding capital gains on donations of appreciated securities). But this is only if you itemize deductions (so giving up the standard deduction), and thus is best to do only once in a few years, concentrating your donations to make itemizing worthwhile. There is a cap of 60% of income (100% this year because of the CARES act) for deductible cash contributions, 30% for donations of appreciated securities (although there can be carryover).

3) You can donate initially to a donor advised fund to collect the tax deduction early and have investments grow inside tax-free, saving you from taxes on dividends, interest and any sales of securities that you aren't transferring directly to a charity. However, DAFs charge fees that take back some of these gains, and have restrictions on available investment options (specifically most DAFs won't permit leverage).

Re leverage, this increases the likelihood of the investment going very high or very low, with the optimal level depending on a number of factors . Here are some discussions of the considerations:

https://mdickens.me/2020/06/21/samuelson_share_predict_optimal_leverage/?fbclid=IwAR1E7WTtv3KAajK_bjlZc_49YbZB5MkK97RJc74qcC9urkgAEsKB0KIjYjw

https://reducing-suffering.org/should-altruists-leverage-investments/

https://forum.effectivealtruism.org/posts/g4oGNGwAoDwyMAJSB/how-much-leverage-should-altruists-use
https://docs.google.com/document/d/10oDwoulY6jR01ufewyO3XOQvA85Yys7LXWgTUrJt980/edit#heading=h.gl3bx4art973

My own preference would be to make a leveraged investment that can't go to a negative value so you don't need to monitor it constantly, e.g. a leveraged index ETF (e.g. UPRO, TQQQ, or SOXL), or a few. If it collapses you can liquidate and tax-loss harvest. If it appreciates substantially then donate the appreciated ETF in chunks to maximize your tax deduction (e.g. bunching it up when your marginal tax rate will be high to give up to the 30% maximum deduction limits).

I have some basic tips for UK investors which are a good baseline to work off.

1. Put your money into an Independent Savings Account (ISA). You can put in £20k per year tax-free. If you have more than £20k now, you can move another £20k at the start of the next tax year.

2. For a new investor, I think a simple and good method is getting a Vanguard Lifestrategy ISA with 100% equities - this buys you stocks across lots of different markets. As far as I know, Vanguard has the lowest fees at about 0.15% - even these small percentages are important as they eat up bigger investment gains. If you're doing patient philanthropy, you want equities not bonds for higher returns.

3. See this post for discussion of donor advised funds, which might have more tax advantages, though advice seems inconclusive at the moment.

4. For god's sake don't buy a house.

I think that even within EA people will have varying opinions on investing, with a bent towards using standard low-cost index funds, employing leverage, and/or doing factor investing. I second the recommendation for Bogleheads to learn about implementing a standard investing approach. This 80,000 Hours post titled Common investing mistakes in the effective altruism community provides an introduction to alternative asset allocations, leverage, and factor investing.

I wrote an EA forum post that focuses on advising EAs to move cash into higher-interest accounts, but it covers various aspects of investing from donating appreciated securities to asset location in the appendix. I hope that is a helpful resource!

Using a donor-advised fund could make sense for donating later to gain some immediate tax benefits and to have the money compound with zero taxes.

I personally believe in using evidence-based investment approaches at an asset class level rather than at a securities level (for example, tolerance band rebalancing). The 80,000 Hours post references this at the end of the post. Unfortunately, most of these approaches range in difficulty from being inconvenient to requiring an investing algorithm to implement. That's one of the reasons why I started an EA-aligned investment firm, Antigravity Investments, which helps EA organizations and donors address implementation barriers. Feel free to get in touch.