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Investing to Give Beginner Advice?

by Rook1 min read17th Jun 202017 comments

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InvestingPatient altruismDonation choice

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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 careful and 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 give me higher returns 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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20Using the tax system and stock market to donate more: a few basic strategies

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3 Answers

CarlShulman

Jun 17, 2020

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).

[-]Denkenberger1y 8

In the US, it's now up to 60% of income that can be donated as cash with a tax deduction.

2CarlShulman1yThanks, edited.

7Cullen_OKeefe1yIt's actually 100% for 2020 [https://forum.effectivealtruism.org/posts/y6cAdZEhs6DbQoDjm/cares-act-allows-charitable-deduction-of-100-of-gross-income] due to the CARES Act!

[-]MichaelStJules1y 3

Also, it might be worth waiting until the pandemic situation is clearer or passes before leveraging.

4CarlShulman1yE.g. the VIX, a measure of stock market volatility (and risk plays a role in formulae for leverage) is above 30 right now, close to twice the typical level. Although that's a quantitative matter, and considering future donation streams (which are not invested), pushes towards more (see the book Lifecycle Investing [https://www.lesswrong.com/posts/4wL5rcS97rw58G98B/review-of-lifecycle-investing] ). But people shouldn't do anything involving leverage before understanding it thoroughly.

[-]HenryStanley1y 2

Leveraged ETFs are meant for short-term investing I believe - they're rebalanced daily which reduces their value over time.

4MichaelStJules1yIt reduces their value compared to a theoretical benchmark, not compared to investing in the same things without leverage over the long run, although the gap is smaller than you'd expect and you're taking on more risk. Also, there are the management fees with leveraged ETFs, too. Not rebalancing frequently seems riskier if you're using leverage, since you can go negative.

[-]MichaelStJules1y 2

Does it make sense to combine leveraged standard stock ETFs (UPRO, TQQQ, SOXL, TECL) with leveraged bonds (TMF, TYD; these are US treasury bonds) and leveraged gold (UGLD)? The bonds and gold can reduce your risk and maximum drawdown, although I suppose your overall long-term returns will be lower, while higher than the same portfolio without leverage. UPRO lost 75% to the bottom of the pandemic loss, and is still down 50%, from February 19. If you're relatively risk-neutral and investing long-term with this part of your portfolio, maybe it makes sense to just skip the bonds and gold (in this part of your portfolio)?

John G. Halstead

Jun 18, 2020

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.

[-]jackmalde1y 1

Interesting post on investing rather than buying a home.

I would just point out that the calculation is quite dependent on how much has to be borrowed from a mortgage provider. If hypothetically one doesn't need a large mortgage, or any mortgage at all, buying could be better.

Also from a pure altruist's point of view I suppose the fact that any increase in house value is money you will only have when old may not be that relevant if you're happy not to enjoy that increase in value for yourself and instead just want to donate the property to an altruistic cause when you die. This would probably only be relevant for those who don't want to have children though.

[-]Louis_Dixon1y 1

I'd add that since timing the markets seems impossible, drip-feed investing seems to be a good idea because of something called pound-cost averaging. You can do this easily with Vanguard by setting up a direct debit. I've also heard the US and UK personal finance subreddits recommended by some smart people.

6John G. Halstead1yI'm very sceptical of pound-cost averaging. 1. Empirical research. I did look into this and a quick google scholar search reveals lots [http://valueaveraging.ca/research/Nobody%20Gains%20from%20DCA.pdf] of sceptical [https://link.springer.com/article/10.1007/BF02827219]papers [https://link.springer.com/article/10.1007/BF02827219]. 2. The theory doesn't make sense. On the efficient markets view, at any time that you put money into the stock market, you would expect the market to rise, just because the stock market increases over time in expectation. If you have £1m, then you would always be better off in expectation putting that into the stock market as a lump sum. If you spaced it out as 100 £10k investments over 100 months, then, in expectation you would miss out on the investment returns you could have got in those 100 months.

1Louis_Dixon1yInteresting, thanks. For point 2 - is there some trade-off from the instalments being spread over time against the time they're in the market for? On one hand, you have investing £10K in one payment and leaving it for 5 years, and on the other hand investing £2k each year for 5 years. But could there be a middle-ground, some function of the variability and average returns, e.g. spreading the £10k in monthly payments in the first year, then leaving it for the next four, that does better than both extremes? For point 1 - from very quickly skimming these papers (and as an amateur) it looks like the pound-cost averaging approach is beaten by other more complex approaches, but it still seems to be better than lump-sum. Is that your understanding? Is there a timing approach you'd recommend?

1Louis_Dixon1ySomeone shared this link [https://static.twentyoverten.com/5980d16bbfb1c93238ad9c24/rJpQmY8o7/Dollar-Cost-Averaging-Just-Means-Taking-Risk-Later-Vanguard.pdf] with me which supports your view that lump-sum is generally better, especially if you don't have diminishing utility.

[-]nil5mo 1

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.

Does anyone know if there's an ISA (Individual Savings Account) w/ a fund that doesn't invest in meat and dairy companies and companies that test on animals? (I know that I can open an ISA on something like Trade 212 and invest in individual stocks myself. But due to having more important things to work on, I'm looking for a more "invest-and-forget" type of investing.)

Brendon_Wong

Jun 23, 2020

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.