Putting Church Finances in Perspective

[Vanguard]

54 minutes ago, Analytics said:

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Yes, the market value of these assets are volatile, and if the market value would likely crash when the hypothetical rainy day comes along. However, this is a risk they chose when they allocated their investment portfolio this way. Presuming they know what they're doing, investing in equities is proof that their goal isn't to have cash available for a rainy day, but rather is to grow the size of the portfolio over the long haul.

I don't see it that way. And yes, wherever there is a portfolio to be grown there is a concomitant risk of loss. The question is, however, is the associated risk tolerable enough to merit growing said portfolio at the pace they believe they should be taking. Of course, if you can think of another investment strategy that would reap higher gains at said pace and without the associated risk then you have a point. I don't think there is another investment strategy that would get those kinds of returns though.  

[Analytics]

20 hours ago, bluebell said:

I guess I meant, doesn't it just exist on paper at this point?  Because the values set by active markets change day to day and sometimes u-turn on a dime.

Like, we can say it's worth 1 billion dollars today (easy number picked for the sake of argument) but could be worth something substantially less tomorrow, next week, next month, etc., right?  The money exists on paper but not in real life, and what determines the amount can be volatile?

That's what I'm wondering.

Everything you said here is true, it's just a matter how you look at it.

From the perspective of accounting, setting the values of assets and liabilities (i.e. "valuation") to put on balance sheets is a challenging thing. Cash is easy, but the problem with cash is that it doesn't generate any investment income. Because of that, most assets aren't in cash. So how do you value everything else? Bonds should be easy, right? A bond might have a $10,000 face amount, but you don't get the $10,000 until the bond matures at a fixed maturity date years in advance, and that's assuming the company that issued the bond doesn't default. You could sell the bond, but the price you can sell it for is a function of interest rate curves and the credit-worthiness of the issuer.

And what about real estate? One of the Church's assets is an office building on South Temple. But what is that building worth? How do you put a price on the Church's art collection? The contents of the vault in Little Cottonwood Canyon?

Accountants have been grappling with the question of valuation for decades, and one of the very most fundamental decisions they've made about valuation is that if an asset is actively traded on a market, the value of the asset is the market value of the asset. At the moment I write this, each share of Apple stock the Church owns is worth $15.49. That amount is volatile and changes from moment to moment according to the whims of NASDAQ traders. But that is the equilibrium price of the share as determined by the free market, and thus that is the value. 

From the perspective of accounting, this is the best way to look at it. The value of something that's traded on the market is the market value. The valuation of everything else is what's tough.

[Analytics]

20 hours ago, Vanguard said:

I don't see it that way. And yes, wherever there is a portfolio to be grown there is a concomitant risk of loss. The question is, however, is the associated risk tolerable enough to merit growing said portfolio at the pace they believe they should be taking. Of course, if you can think of another investment strategy that would reap higher gains at said pace and without the associated risk then you have a point. I don't think there is another investment strategy that would get those kinds of returns though.  

If we presume the Presiding Bishopric and Ensign Peak Advisors are managing the portfolio professionally, they are taking a lot of things into account, which includes both their risk tolerance and their objectives with the portfolio. Looking at common advice for individual savings, a generally smart thing to do is to cash out most of 401(k) at retirement and use the money to purchase an immediate annuity. If that's what somebody's plan is, they might want to pull out of the stock market as they approach retirement age, because of how catastrophic a market crash would be to their retirement if it happened right before they pulled out of the market. But if retirement is 20 years away, leave all your assets in stocks--over a long time the higher stock returns outweigh the risk of short-term volatility.

When insurance companies purchase assets, they spend a lot of time analyzing their portfolio of liabilities first. If your liabilities have a short duration, you don't want to back those liabilities with long-duration assets. That's because if interest rates go up, the value of the assets will fall faster than the value of the liabilities, and the insurance company won't have the cash when they need it. The managers at Silicon Valley Bank must have understood this, but they wanted the higher returns of long duration assets, and they bet the company that interest rates wouldn't go up. When they did, the company went insolvent. 

If the purpose of the "rainy day fund" is to have assets that can be spent when the country has an economic catastrophe, then the smart thing to do is to invest it in something that won't lose its value when the economic catastrophe hits. In contrast, if the purpose of the "rainy day fund" is to maximize the size of the asset portfolio over the long term, then the smart thing to do is to invest in the stock market, because it offers the best long-term growth prospects.

[Vanguard]

1 hour ago, Analytics said:

If we presume the Presiding Bishopric and Ensign Peak Advisors are managing the portfolio professionally, they are taking a lot of things into account, which includes both their risk tolerance and their objectives with the portfolio. Looking at common advice for individual savings, a generally smart thing to do is to cash out most of 401(k) at retirement and use the money to purchase an immediate annuity. If that's what somebody's plan is, they might want to pull out of the stock market as they approach retirement age, because of how catastrophic a market crash would be to their retirement if it happened right before they pulled out of the market. But if retirement is 20 years away, leave all your assets in stocks--over a long time the higher stock returns outweigh the risk of short-term volatility.

When insurance companies purchase assets, they spend a lot of time analyzing their portfolio of liabilities first. If your liabilities have a short duration, you don't want to back those liabilities with long-duration assets. That's because if interest rates go up, the value of the assets will fall faster than the value of the liabilities, and the insurance company won't have the cash when they need it. The managers at Silicon Valley Bank must have understood this, but they wanted the higher returns of long duration assets, and they bet the company that interest rates wouldn't go up. When they did, the company went insolvent. 

If the purpose of the "rainy day fund" is to have assets that can be spent when the country has an economic catastrophe, then the smart thing to do is to invest it in something that won't lose its value when the economic catastrophe hits. In contrast, if the purpose of the "rainy day fund" is to maximize the size of the asset portfolio over the long term, then the smart thing to do is to invest in the stock market, because it offers the best long-term growth prospects.

Thank you. I appreciate your insights. : )