When making a charitable contribution, most people (including me for many years) reach immediately for their checkbook to write a check.  It is understandable why this happens – giving cash is both simple and easy – and may still be the best option for small gifts.  Another choice however has become very popular in recent years and can make a lot of sense: the donor advised fund.

A donor advised fund is an account, maintained and operated by a 501(c)(3) organization, called the sponsoring organization.  You can open such an account and give it any name you want, such as the “John and Jane Doe Foundation” (even calling it a foundation – allowing you to ostensibly keep up the Jones’).  Then as the donor to the fund, you make contributions into your account.  There is often a minimum contribution amount, such as $10K – along with a minimum balance requirement – but because there is no separate auditing of these funds, they don’t have a separate tax ID or requirement to file a Form 990 (as exists with a private foundation).

Because your contributions to these vehicles are irrevocable, the supporting organization has legal control of the fund.  However, with a donor advised fund, you as the donor retain advisory privileges with respect to both the distribution of your charitable contributions and the investment of the assets held in the fund.

The supporting organization typically invests the donor advised funds in a pool of mutual funds, and allows the direction of investment asset allocations.  The supporting organization also typically charges an asset-based fee to cover the administration of the donor advised fund.

As the fund’s advisor, you may direct the supporting organization to make specific donations to 501(c)(3) charities that you favor.  There is often a minimum donation amount from your fund, but it is reasonable, and can be as low as $250/grant.  Finally, you may also set up successor advisors that can make those recommendations when you can’t.  This can be a fantastic tool in teaching your children the value of making gifts.

From a tax vantage point, you get the same benefits with a donor advised fund as with writing a check.  Because your contribution to your donor advised fund is an irrevocable gift to a 501(c)(3) supporting organization, you get full access to the standard IRS charitable deduction.  The actual amount that you can claim for a charitable deduction is limited by the contributed asset type and your adjusted gross income.  For contributions of cash, you may deduct up to 50% of your adjusted gross income.  For contributions of long-term capital gain property (i.e. appreciated securities fall into this category), you may deduct up to 30% of your adjusted gross income.  Regardless, the charitable deduction is earned in the year you make a contribution to your donor advised fund – not when you advise the supporting organization to send funds to one of your favorite charities.  If your charitable deduction is limited, you can carry forward any non-deductible amounts for up to 5 subsequent years.

There are many benefits to using a donor advised fund over a traditional “checkbook charity” approach.  Some of the more compelling advantages are that you can separate your grant-making from the end-of-year deadline for getting a deduction in that year.  For calendar year tax planning, you must only time your contributions into the fund (along with taking your possibly limited charitable deduction).  Thereafter, grants may be made at your leisure – you no longer have to track your grant donations (although the supporting organization will do that for you – and generally make those grant records available online).

As part of your grant making, you can specify to the supporting organization whether the grant is to be made anonymously or not. Furthermore, your supporting organization will check if the entity you’d like to donate to actually satisfies the condition of a 501(c)(3) organization, further simplifying your responsibilities in making charitable donations.

Long story short, if you are the kind of person that recognizes that what you have accomplished could not have been done without the many investments made by others – and you’d like to “give back” in an efficient and practical way, then a donor advised fund might just be your ticket.

Successful investors all have one thing in common – a solid set of principles that allow them to (a) effectively build wealth over time with their at-risk capital and (b) avoid the emotional ups and downs that invariably come with being an investor.  Adopting good investment principles is perhaps one of the “biggest rocks,” and very importantly, having such principles is completely under the control of the investor (as opposed to the short term vicissitudes of the capital markets).

Author and financial industry speaker Nick Murray suggested some key principles in his book Behavioral Investment Counseling that I believe are highly effective — and would like to share.

First what exactly are principles?  At root, they are an attitudinal approach to investing that exists in the mind of a long-term investor.  Principles are foundational in nature, and lead to effective investment practices — in the same way that belief leads to action.  As a good set of core principles differentiate the most successful investors, here are some principles to live by:

Optimism.  Successful investors have faith in the future, and conclude that it is more powerful to bet on economic global success than crisis or failure.  They adopt this perspective because it is the worldview that best aligns with the historical record.  This long-term optimistic perspective is held not in spite of the facts, but as a conclusion from them.  They understand that competitive economic market forces are going global and quickening the pace of economic growth.  Even though the U.S. economy may be challenged in the short-term, these forces will likely to accelerate the arc of human progress over the long-term.

Patience.  Successful investors also demonstrate patience.  A patient investor does not feel compelled to react or to make changes to her core investment approach when faced with challenging economic times — such as the times in which we now find ourselves.  Having patience represents a refusal to react inappropriately to disappointing events.  Instead, patience is a principle that invokes a decision not to do something wrong.

Discipline.  Not the least of Murray’s three principles is discipline.   Discipline in many respects is the flip-side to patience.  A disciplined investor has a determination to keep to her core investment practices in the face of challenging economic circumstances.  Discipline, therefore, is the active decision to keep doing the right things.

These core principles provide the fundamental emotional intelligence that distinguishes the most successful investors.  When combined with effective investment practices, they provide a powerful framework for long-term, goal-based wealth creation.   Investment practices are the actual methods used in portfolio management — and are where the rubber hits the road.  The following practices have proven their worth over time and are ones that I highly recommend.  In future posts, I will share why these practices are so effective:

Diversification by asset class.  Diversification by asset class refers to the thoughtful selection of assets with which to create an investment portfolio.  Prime examples of asset classes include fixed income (including bonds and cash equivalents), equities (including domestic, international and emerging market stocks), and Alternatives (such as real estate, commodities and natural resources).  Because of the fundamental economic relationship between risk and return, to an overwhelming degree, an investor’s selection of asset mix has the primary impact on that investor’s long-term investment returns.

Diversification by security.  Once a “policy decision” is made as to asset class allocation, successful investors further
diversify within any one of those asset classes.  This is different than diversification by asset class, which speaks to the allocation of a portfolio among asset classes.  Diversification by security selection speaks to the approach of making broad investments within each one of the selected asset classes.

Rebalancing.  One final practice of successful investors is to periodically rebalance their portfolios back to the asset allocation that they have intentionally set.  This practice both keeps a focus on the intended allocation, and returns the portfolio to a allocation that provides the most appropriate balance of risk and return.

Although these principles and practices are definitely “big rocks” when it comes to long-term, successful investing — they are sometimes forgotten by investors.  Most often, this forgetfulness occurs during stressful economic times.  It is during such times that it is important to revisit your core principles and to re-affirm your practices.  Such a habit will certainly prove supportive to your long term financial success!

With recent media pieces alarming investors about stock market volatility (a recent USA Today headline proclaimed, “Volatile Market Dashes Investors”), I feel the need to put things in perspective.

It’s true that if you’re not invested properly – and were planning on selling stocks to pay for your kid’s college education later this month, you might be feeling some pain right now (in a future post, I will talk specifically how to invest for college). Volatility is not your enemy; however, until you react to it, panic, and sell stocks at the bottom.  Unfortunately, human investors (which include most of us) are behaviorally predisposed to do just this.

Instead, think long-term and work to a plan – adhering to a mix of stocks, bonds and cash that makes sense for your age, wealth and future income needs.  It turns out that this mix (what we call investment policy), and your ability to manage it over your lifetime, overwhelming dictates the capital market return on your properly diversified portfolio.  This is because the historically volatile upswings and downdrafts of stocks tend to cancel each other out, producing the actual capital market return.  Adhering to an appropriate mix of assets tends to inoculate you from market volatility.

So, instead of making volatility your enemy –focus on techniques that turn it to your advantage (if not your friend).  One excellent technique is to dollar-cost-average savings into your portfolio over time.  Making consistent, ongoing purchases (such as participating in a 401(k) plan) guarantees that you will buy some shares when prices are low.

A second technique is to rebalance your portfolio at least once a year.  Rebalancing means buying or selling stocks to reach your predetermined, appropriate-to-your-situation mix of assets.  If stocks have climbed precipitously, then to rebalance, you would need to sell some of them in order to purchase bonds and cash.  This technique brings your portfolio’s balance of stocks and bonds back to a mix that is appropriate for you – effectively “selling high” and “buying low” which is much easier to do than the old adage of “buying low and selling high”!

I want to use my inaugural post to re-tell the now famous ‘big rocks’ story.  This story is mostly told in context of improving “personal effectiveness,” but I will show how the moral of this story supports my intention for this blog.  Indeed, focusing on ‘big rocks’ is foundational to success in financial planning, investing and living one’s life to the fullest.

Even if you have heard this story before, its message is timeless:

A guru was speaking to his students and concluded his discussion one day with a quiz.  He pulled out a one gallon, wide-mouthed jar, placed it on the table in front of him, and proceeded to fill it – one at a time – with large-sized rocks.  When no more “big rocks” could be placed into the jar, he asked his students, “Is the jar full”?  They enthusiastically replied, “Yes!”

Without saying a word, the guru then pulled out a bucket of gravel, and started dumping the gravel into the jar.  With some strategic shaking of the jar, the guru was able to work the gravel down, filling all of the spaces between the “big rocks”.  The guru smiled, and again asked his students, “Is the jar full now?”  Enlightened, one of the students replied, “Probably not!”

“Good,” replied the guru – and he reached under the table a second time to retrieve a bucket of sand.  As he poured the sand into the jar, it worked its way into the remaining spaces between the gravel and “big rocks”.  Once more he asked his students, “Is the jar full now?”  Now, they were on to him, as they shouted, “No!”

“Good!” he replied – and he reached for a pitcher of water and filled the jar to its brim.

Turning back to his students, the guru asked, “And what is the point of this exercise?”  One student raised his hand and said enthusiastically, “No matter how much you do, there’s always time to cram something else in!”

With only slight frown, the guru, explained, “No that’s not it at all.  The moral of this story is that if you don’t put the ‘big rocks’ in first, there’s no hope of ever getting them in.”

So it is with trick of being able to live fully and abundantly.  If you don’t focus on your life’s ‘big rocks’ – putting them first – you’ll never have a chance to achieve them.  It’s my intention to share in future posts, techniques and structures for helping you do this – enabling you to effectively move forward.

Being focused on the ‘big rocks’ in the financial planning and investing domains has a similar positive impact.  Every day we are bombarded with a myriad of financial facts, techniques, strategies, and vehicles.  Much of this is ‘noise’ or sand – and it can all be very confusing.  My thesis is that by focusing on a few ‘big rocks,’ you can easily create a financial and investment plan that is right for you – resulting in an extremely successful experience over time.  I’m very excited to being able to share these ‘big rocks’ (along with a few pebbles and a bit of sand where appropriate) with you over time!