It's difficult for a small portfolio to achieve a 5% cash return so
there will need to be some asset liquidation each year.

Another plan might be to contribute these assets to a large, well run
community foundation in your area. The assets would become part of their
large, professionally managed portfolio and relieve you of this
investment hassle.

Tad - Thanks for the link - it looks interesting, right away. (I
thought somebody should acknowledge something - I always wonder where
OP's disappear to I don't see how it's possible to make an assesment
without some target or goal information, as you also mentioned.)

datetree wrote:
- quote -

It sounds like this is your own family's foundation but still, you
should apply the standards that you'd apply if you were managing a
foundation for someone else (or those you'd apply to someone you hired
to do the task for you). You probably wouldn't grab a strategy out of a
book like that, and I'd recommend spending time on a more methodical
process.

Part of this depends on the goals of the foundation which is a family
discussion. It may be perfectly acceptable to put the money in CDs even
if it means it would be gradually depleted - you may have a goal of
gradually depleting the foundation instead of creating something that
will need oversight 70 years from now (the 5% is a minimum). If you want
to create something lasting then of course you'll want to be more
aggressive to better meet future donation needs.

Regardless, an all-stock strategy strikes me as risky...foundation money
wouldn't typically be invested that way, if you had a paid fiduciary
overseeing it. Though I wouldn't dismiss the basic framework you have so
far - allocating across some of the broad-market indices using
passively-managed funds. Much of the guidance towards fiduciaries
suggests that as a good and defensible method. It's just that you
probably want to do something other than those three, and you'd balance
them out with bond and cash investments. And probably not evenly
divided...a Russell 2000 index fund is usually considered a riskier,
therefore lower-allocation, kind of investment.

You might find it helpful to read about how fiduciaries are supposed to
invest for entities like foundations - creating a written investment
policy statement, determining strategy, etc. It'd take some effort to
plow through more info than you need, but it's not exactly rocket
science and the reward would be a well-managed foundation (without the
associated fees of a paid fiduciary). There's a "Center for Fiduciary
Studies" that produces useful publications, guidelines, etc. You might
even want to attend one of their seminars, you are in effect acting as
an investment advisor to a foundation so it makes sense to put that kind
of hat on. See http://www.cfstudies.com/

-Tad

Percentages into an asset allocation are not the way to analyze this
problem. The need stated is 5% of a million, which is $50,000. So the
problem is how to harvest the $50,000 from a million each year. A
conservative startegy could involve putting 8 years (of charity
contributions) in cash, then investing the remaining amounts in
equities. Whenever there is a market gain of more than $50,000, it
should be drawn out (or equities) and moved to cash. A more agressive
version of this would be to calculate the interest gained on the cash
investments, and only withdraw the difference from the equity slice of
the pie (keeping a large amount invested in equities).

details:

Start by keeping $50,000 into CD's (5 CDs of $10,000 each). This is
one year's charity contribution. Set up one group of $50,000 CDs to
mature every year, and have 8 years worth taken out of the million at
the start. For longer maturities TIPS might be helpful or other bond
type investments could be considered. 5 year bond (TIP or other) then
a 3 year CD, is 8 years cash investments ($400,000) in this paradigm.

Consider using the remaining $600,000 in stocks. The goal is for this
$600,000 to grow more than $50,000 each year. Not a reasonable goal,
but consider the interest/ dividend payouts of the 8 bonds/ CD's might
allow the $50,000 equity gain to be reduced. There is also an 8 year
cushion to ride out a market decline when first starting.

There might be some merit to suggesting use $200,000 of the equity
exposure and invest this in dividend paying stocks, then divide up the
remaining $400,000 into other asset types (REIT, small cap,
international, large cap growth). The dividend paying stocks represent
a core holding and the other asset classes represent growth. The
$600,000 equity slice of this could be divided up in several allocation
models to collect the $50,000 needed each year.

datetree wrote:

- quote -

You might look at the 500-year portfolio and the model portfolios at
http://www.fundadvice.com

---
Fred J. Tydeman Tydeman Consulting
tydeman[at]tybor.com Testing, numerics, programming
+1 (775) 358-9748 Vice-chair of J11 (ANSI "C")
Sample C99+FPCE tests: http://www.tybor.com
Savers sleep well, investors eat well, spenders work forever.

datetree -

Yoy. That's a lulu. As you perceive, keeping it in "risk-free" income
is going to shrink it. Is the trust intended to grow, in perpetuity, or
is it designed to dissolve to heirs at some time, at or near its
present value? What kind of management fees are paid, or what kind of
investment expenses budget is there? The reasons I ask those two
questions is to inquire about the risk parameters intended, and to
guage how much you might pay for investment publications or counsel.
How many years of investment experience do you have with stocks, bonds,
options (respectively)? (Obviously, you have some knowledge, but
possible workable suggestions would hinge on how much knowledge, and
experience, or how much time you are willing to invest in your
management.)

One thing I see is that while stock market returns average above the 5%
payout, if that payout is required annually there will be down years
which may lead to selling off some stocks at depressed prices. If you
keep a cash reserve of, say 10% to avoid that forced drawdown in two
successive bad years, you would significantly mitigate that problem.

The debate about "something even better" is ongoing, and will be,
forever, I believe we all dearly hope! This may not be the best
organized post ever ... but I think the question to ask yourself is
what the required return is, averaged over many years. Once you have
defined that, and worked the math, you'll know more about where to get
that return.

I am the trustee for a small family "private foundation". We have a
million to invest, out of which we must contribute 5% each year to
public charity. So far we have stuck with the safe stuff like CD's,
and TIPS. I have heard of Ray Lucia's Buckets, and the
"Armchair Millionaire Investment Strategy" where you put a third each
of the fund in SP 500 Index, Russel 2000 Index, and Morgan Stanley
EAFE World Index. I'd appreciate it if someone could comment on the
two methods, or come up with something even better.
Thank you all in advance. Oh, my email above is incorrect and I don't
know how to change it.