In the investing realm, many believe that meeting CPI (consumer price index) + 5 percent in today’s market environment is an easily achievable goal. In truth, this spending target is far more elusive than we would like.

 

Russell Investments’ team of investment strategists predicts that over the coming decade, a passively managed 60 percent equity, 40 percent fixed income portfolio generating market returns only has a 20 percent chance of returning enough income to hit a 5 percent spending target. And, according to the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters, over that same ten-year time horizon, the inflation-adjusted growth of this traditional, passively managed portfolio will fall to 2.8 percent. This is a return that lies below what many nonprofits need to achieve their spending objectives without taking on excessive risk.

All of this means that boards and investment committees are now facing a new, harsh reality: They can no longer rely solely on market returns and strong manager selection to meet their return requirements.

All of this means that boards and investment committees are now facing a new, harsh reality: They can no longer rely solely on market returns and strong manager selection to meet their return requirements.

So, what are the options?

We believe boards and investment committees should work with their investment providers to harness market volatility in their favor. This will require them to come up with creative ways to generate returns that may not be available from the market alone, thereby increasing the likelihood of achieving their organization’s investing goals. One way investors can do this is through dynamic portfolio management.

Read the full article on CPI + 5% by Lisa Schneider and Martin Jaugietis at BoardSource.