I have another strange idea: what if there was some kind of mutual fund that took the capital gains and used that to fund community projects? What if we could pool our resources together; grow the principle over time, and crowdsource a large donation together? We could be sowing the long-term seeds of the future while compiling many small contributions to becoming a large force for good.
Microfoundations Review
I wrote previously about how we can leverage passive investing to create a funding source to our own benevolent endeavors that continues to grow in size and in impact. I called them “microfoundations” since we can start them today when we have little to no assets, but yet over time they continue to compound to the point they become full-fledged foundations, but we were able to scale up our giving alongside the portfolio growth. How this all worked was based on a concept I called Perpetual Value Theory, which states that if consistent investment contributions are paired with consistent withdrawals, each contribution achieves a continued life cycle that gets used for consumption indefinitely. Thus we continue to contribute to an investment fund that grows over time, but if we continue to pull a small percentage out annually, what we’re actually pulling out is small portions of each previous year’s contribution, thus the overall portfolio continues to grow along with the size of our withdrawals. This would allow an individual user to scale up their donations over time. You can read more about that concept here: https://grantxstorer.com/2018/microfoundations/
Uniting Foundations Together
It’s a nice concept, and it’s fairly easy for an individual to implement since all you have to do is open one of those investment accounts that automatically diversifies your portfolio, like Betterment, Wealthfront or Acorns, and once a year take a portion of the balance out and use that to donate to the organization of your choice. But the issue that persists with this concept is that it takes our already small donation today and makes it even smaller, since the $100 we were going to give now turns into a $10 donation today.
So that got me thinking: If our individual contribution doesn’t hold a lot of weight today, what can we do to give us positive feedback today so that we can hold on until our individual investment compounds to being a meaningful foundation that allows us to contribute thousands of dollars to helping others? What if we played into the crowdfunding concept for that gap?
Crowdfunding like Kickstarter, GoFundMe, & Patreon have allowed large group of small contributors that give as little as $1 to as much as $500 towards projects, initiatives or products that previously would have required a large bank loan or venture capitalist to invest in to get that project off the ground. We buy into these projects since it provides us with tangible feedback that our contribution is one of many other building blocks that will complete a project that we want to support. We see the goal and get immediate feedback that we helped move towards that goal even if what we contributed wasn’t all that much.
This concept could be implemented into the microfoundation design, so that each microfoundation is just one part of a whole foundation. Each individual contributes their resources into the fund, and at the end of the year, their 5% withdrawal is paired with all the other microfoundations to make a large donation. Since there probably isn’t just one initiative that everyone wants their fund to be contributing towards, the fund could be split up amongst the different initiatives. The goal still is to leverage large numbers of small investors, so within this centralized fund there would have to be constraints on the number of organizations that are going to be recipients, but diversity can grow with the expansion of the fund itself. Perhaps every year, each member gets to vote on a list of proposed organizations that will be added to the recipient list, and each year the members attach their microfoundation to a given recipient, and thus their contribution will be paired with all the other members who also aligned with that recipient.
Comparing Alternatives
This may seem like a more convoluted version of making a simple donation, but this concept deviates from traditional giving or from other community funds in its approach towards investment and the means of making a donation. Let’s observe some of the present options available to make productive donations.
Direct Donations
Yes, you can just find an organization that you want to donate to and donate directly to them, and I hope you’re already doing that. I’m still doing that in addition to exploring this concept. But as I stated in my Microfoundations post, nonprofits are not getting enough in donations as it is, because we aren’t allocating enough of our personal finances to philanthropy. We could simply solve this by donating more, but that fights against every present-day constraint we have and sadly, unless we automate the process, we’re going to resort back to a more comfortable donation amount that comes after all our other consumption. I’m looking for sources to expand our capacity to contribute given our current constraints. In addition to that, if we simply donate from money that comes from our wages, our money has a single life cycle that goes straight from our wage production and we passed the consumption to the nonprofit. If that donation was coming from capital gains, we can stretch the usefulness of a given dollar so that we can provide that same dollar to the given organization repeatedly over time.
Community Wealth Funds
Another rising trend are community wealth funds, which they vary in many different types of forms. They typically have a target audience that they’re trying to help that generally is a local neighborhood or district. They try to leverage their cash balance to provide unique opportunities, like subsidized housing for low-income families, or low interest loans to upstarts that aim to improve the quality of the community. In many ways, they act like microfinance institutions that try to provide minimal barriers to community improvement. The programs are wonderful in that when it’s done prudently, it provides opportunities to struggling parts of the community and focus on improvement from a bottom-up perspective. If the loans are structured properly, the fund can be used multiple times over and pass on the benefits to the community. But this is also doesn’t represent the concept I’m proposing since much of these funds’ assets consist of loans and other forms of interest-bearing investments outside the public market. These are very volatile investments that require a lot of hands-on management to implement that an average donor would not be able to do individually. The concept I’m proposing is investing in the public equities and bond markets through passive means of ETFs to provide ease and stability, and then cash out capital gains and using that to donate to particular organizations.
Foundations
Foundations are the closest thing that I’m describing, since foundations sit on a pool of assets and based on the written purpose of that foundation, it will use its assets towards that end. Typically foundations are built by wealthy individuals who try to effectively put their wealth into productive action. The foundation may utilize investing strategies to prolong its longevity, but it will then find organizations that fit the foundation’s criteria and donate to that cause, or provide scholarships to schools that focus on a particular agenda. That represents much of what I’m trying to implement, which is why I called the personal version of this concept as a Microfoundation, since it aims for achieving the same ends, but incrementally scaling to that level of impact over time due to investment growth. Where the community aspect of this comes from is that this particular “foundation” is compiled of many Microfoundations and they as a collective whole steer the foundation to contributing towards agreed upon initiatives, rather than it being a static directive that may come from a deceased philanthropist.
Impact Fund Breakdown
I’ve been rambling on about what this concept isn’t like, and have given some vague descriptors on what this concept is like, but I think it might be useful to envision what this could actually look like from the ground up.
What I’m envisioning is a large investment portfolio, much like endowment managers and hedge fund managers put together; meaning there is a central set of assets that are being invested in, and each new member contributes to be part of that fund. The fund would be aimed for long-term growth that can take on short-term risk. It could be as easy as compiling a set of ETFs in different sectors, or the portfolio could be individually selected assets to more accurately align with social initiatives, but that would require more hands-on work.
Now to bring members in, what would happen is each individual who wanted to start their own microfoundation within this fund would open an account and contribute money to the fund and can also place an auto deposit as well. The member would then have a portfolio profile much like what you would get when you open an account through any roboadvisor account that would show what assets are being held in the account and how much it has grown in value over time. All the money that the member deposits into the fund would be tax-deductible, since this fund would technically be considered a nonprofit foundation. By making this initial contribution the tax-deductible part and not the year-end donation to the designated nonprofit recipient allows the member to receive tax benefit for the whole contribution upfront, and then be part of residual donations that are made from the capital gains of that initial investment over time. By receiving a tax deduction upfront also means that the fund gains some stability assurance as well since the members cannot legally claim that investment back, but can only direct that the remaining funds all be liquidated and used for the end donation.
Once the fund has been established, and members have contributed money to that fund, the managers will start the investment process and track its growth and provide updates to the members on performance. At the end of the year, 5% of the fund will be liquidated and held in cash reserves to wait for confirmation on donation allocation. During this time all members will confirm where they each want their portion of the money to be donated to, and will be all tallied together to create the end distribution.
For example, let’s say there were 4 initial members: Members A, B, C, & D. Member A currently has $100 in the fund, Member B has $200, Member C has $300, and Member D has $400. This means the fund has a total of $1,000 in it, and thus 5% will be removed from the fund, brining the fund total to now $950. $50 is going to be donated, which that means that each member controls a part of that $50.
- Member A controls $5 ($100 x 0.05)
- Member B controls $10 ($200 x 0.05)
- Member C controls $15 ($300 x 0.05)
- Member D controls $20 ($400 x 0.05)
Let’s say there are currently 2 different nonprofits that are approved as recipients from this fund, International Rescue Committee & Charity: Water (I’m writing this and so I get to impose my bias in this concept, so there). Members A & B decide they want to donate to International Rescue Committee, while Members C & D decide on Charity: Water. This means that International Rescue Committee would receive $15 ($5 + $10) while Charity: Water would receive $35 ($15 + $20).
Over time, the fund would attract more members that will add to the fund, but also the fund would incur capital gains on the assets it holds, and thus not only will the fund increase in size, but each member’s donation portfolio increase as well. The perpetual life cycle of investment is described more in depth in a previous post of mine, but when that concept is applied to this structure, it will allow these members to create a portfolio that will stretch the capacity of each dollar donated is able to be used, while they receive the positive feedback that they contributed to these large donations for sweeping impact.
Summary
Everyone typically wishes they could do more, but much of the time we don’t have much to give and the need seems too great. But one of the tools we have is time, and time allows small contributions to grow in size. We can take on this initiative individually, but it again may be difficult to maintain the path since a painful amount of time is needed before momentum starts to build towards any meaningful impact. So we can band together and work collectively to establishing a fund that propel sustainable growth over time and allows each of us to play a part in large initiatives repeatedly over time regardless of how much we individually can contribute. We each can create our own family foundation that will not only leave a legacy but will continue to grow in its capacity to make in impact on society.
I started doing a very basic test on myself with the microfoundation concept this year, and look forward to making my 5% donation at the beginning of next year, but I’m curious if anyone else wants to join me on this. I’m currently only starting with $20/month, so if you want to band together, we could try to start a makeshift informal version of this umbrella fund concept. So ya, hit me up if you’re interested.
