Giving to other people can be the best long-term investment that you can make. But where are your charitable donations really going?
Are your donations going into actual charity works or into mutual funds? Should charities use investment products at all?
If you donate money to a worthy cause, make sure that your contribution is used properly. One problem the Profile Family Office has seen is that after a charity receives a donation, rather than putting it in the bank for safekeeping, the organization’s directors choose to invest it instead. Though the directors may think they’re acting with the best of intentions, in most cases it’s inappropriate for charitable organizations to be investing in anything more speculative than bank deposits.
Imagine if you donated $1 million toward building housing for the poor. While the organization accumulates additional funds to reach its target, the director figures that he can invest your donation in the same mutual fund in which he has personally been investing for many years. He would argue that he is handling the charity’s money as if it is his own, and therefore he is acting properly. But what would happen if the value of the mutual fund dropped? Would he ask you for additional funds to make up for his poor investment choice?
A charity’s board of directors has to remain focused on the charity’s goals. If it is a school, it should be paying teachers; if it is a soup kitchen, it should be feeding the hungry; if it is a hospital, it should be buying medical equipment. Charities should further their own ends, not try to make money in short-term investments. In the case of an endowment, which is a very large sum of money that is intended to be invested for a very long time and generate income, then it might be appropriate to use more sophisticated investments. However, in such a case, it’s advisable to have professional investment teams oversee the money rather than having the charity’s head invest in his favorite fund.
When making a sizeable donation, consider using a Family Office to oversee the implementation of your gift to ensure that the funds will be used as both you, and the charity, desire.
Disclaimer: This article is for educational purposes and is not a substitute for investment advice that takes into account each individual’s special position and needs. Past performance is no guarantee of future returns.