If you save for retirement when you are young, the standard advice is to emphasize stock-based exchange-traded funds (ETFs) or mutual funds. Stocks increase and decrease in dramatic ways that no one can predict reliably, so this approach carries some risk. Fortunately for US stock market investors, that risk has historically been rewarded, on average and over the long term, with high returns.
As you approach retirement and need to rely on investments to cover living expenses, the standard advice is to shift your portfolio toward bond-based ETFs or mutual funds. Bonds have had fewer and less dramatic booms and busts. For this reason, they are generally considered less risky than stocks. On average, over the long term, bonds’ safety has meant lower, more reliable returns than stocks.
Risk makes less sense for ALA right now. Because of its financial deficit, the Association needs stability. Therefore, in April, ALA’s Endowment Trustees updated the target allocation for the Association’s investment portfolio, reducing our holdings of stocks from 50% to 40%, and increasing ALA’s holdings of bonds from 30% to 40%. As a result, we are sacrificing some projected returns to limit projected risk. If stocks boom as they have in the past few years, ALA’s portfolio will not increase as much as it would have. On the other hand, if stocks crash, ALA’s portfolio will not take as big a hit as it would have.
About the funds
The Association has about 70 different endowment funds that support divisions, round tables, scholarships, and awards. Collectively, these funds are valued at about $50 million. ALA also has a Future Fund that supports whatever the Association most needs. The Future Fund is currently valued at about $15 million. As ALA’s trustees, we invest the endowment funds and the Future Fund as a single portfolio. This gives ALA access to more investment options at a lower cost.
During the pandemic, ALA made a $3 million transfer from the Future Fund to support operations, an amount that the Executive Board recently determined it would not return to the Future Fund. Similarly, this past January, the Board authorized an additional $4 million transfer from the Future Fund to help address ALA’s current structural deficit.
While the Executive Board’s appointed trustees disagreed with the most recent transfer and the decision not to restore the Future Fund, good governance invites this type of deliberation. In our current economic environment, we do not know precisely what conditions will be like in the future, which makes this type of discussion and careful consideration all the more important for the health of our organization. The other trustees and I continue to respect the Executive Board’s acumen, values, and process, and we will continue to evaluate investing strategies that support member initiatives and services.
