Financial Plan for a medium sized state party
One reason debate is so acrimonious within the LP is because the stakes are so low! Raise the stakes, and look like a pragmatic reformer within your state or local party by suggesting the following financial plan. It will give your local party enhanced financial stability.
|
Posted March 01, 2007
Alternate financial plan for the LPPa
Currently the LPPa has interest free checking accounts which the Treasurer uses to handle day to day expenses. The LPPa has no accounts suitable for long term investment. The party needs a simple way to accumulate interest income and capital appreciation for the long-term.
My approach mirrors what an individual would do to safely accumulate capital over the years. This creates a 'pyramid' of accounts.
- The base of the pyramid is the party's current checking accounts.
- The next level is a money market fund. ($2,000 max)
- The top level (until we have over $5,000 in here) is a diversified mutual fund.
Each level has greater risk, and greater potential returns, than the one below it.
The two new accounts—a money market account and a mutual fund account—would be handled much the same way as the current LPPa checking accounts. There would be a few changes designed to tilt the balance toward investing and away from using these two new accounts to pay monthly bills.
Require a majority vote of the LPPa board to put money into the mutual fund account, but require a 2/3 vote to take money out. A simple majority would be okay for the money market account, since taking money out of a money market account does not trigger a taxable event.
Don't create new boards to run everything. Let the Board vote on the transfer of funds into and out of the money market and mutual fund accounts. The Treasurer will handle the actual transfers, just like she does with the party's current checking accounts. Avoid picking individual stocks until the party has at least $5,000 is saved up.
Expand the Judicial Board to a Judicial and Audit Board and give it authority to audit the LPPa books and all of it's accounts. There will be no new boards created, although it might take a bylaws change to expand the "J-Board" into a "J&A Board".
The Fundraising Committee should stick to raising funds, while the LPPa Board would be in charge of selecting investment vehicles and how much to invest. Donors could earmark funds for long term investment, however. The Treasurer would administer all of the LPPa's accounts, as she does now. The expanded J&A Board would oversee everything. This approach involves no new boards and exactly the same chain of command as we presently use.
The actual mutual fund and money market accounts chosen must be approved by 2/3 of the LPPa Board. This will effectively rule out most risky schemes and exotic choices. Require a 2/3 vote to change the investment choices, or to add new funds. This would build in a bias toward diversified mutual funds and index funds.
It is better to choose a mutual fund with a good track record, and invest in it regularly, than to try to beat the market with individual stock picks and invest haphazardly. Also in my opinion, it will be easier to convince people who are interested in the LPPa to donate money to a mutual fund with a high rating from groups such as Morningstar, than to convince them to donate to an undiversified collection of stocks. With my plan, we don't have to become expert stock pickers or market timers. The board can remain focused on running a political party.
Later, when the LPPa coffers are full, we can have a 2/3 vote to add another mutual fund (perhaps an international fund like Oakmark International) for further diversification. Or, we can vote (2/3) to purchase individual stocks. But stocks are sold in blocks of 100 shares. If the share price is say, $50 then you need $50 x 100 shares = $5,000 to buy in initially.
Definitions
Money market accounts are like glorified checking accounts, but they generate interest income. Their share value is kept at a constant $1.00, so taking funds out of a money market account does not trigger a taxable event. They typically require a minimum of $1,000 to start an account, and withdrawals typically have to be over $500. This keeps you from using these to pay your gas bill, for example (unless you have a really big gas bill). You can park money in a money market account and earn some interest. You have the option of transferring some of it to the LPPa's current checking accounts to pay monthly bills, or the Board could vote to transfer funds to the next new account, a Mutual Fund Account.
Mutual fund accounts are investments in a diversified group of stocks, run by a fund manager. The share price can rise or fall, so taking money out of a mutual fund account will trigger a taxable event. It is usually best to keep money not needed for current party expenses in a mutual fund, and allow it to grow over time, reinvesting all dividends.
I would keep about $1,000 in the checking accounts and a maximum of $2,000 in the money market account. Any additional funds would go into the mutual fund account. When the mutual fund account tops $5,000 then consider diversifying into another mutual fund, or start looking at individual stocks. But the key is getting people to invest. With my plan, we only have to convince donors that the LPPa is a good organization worthy of their largesse. If we start picking individual stocks, then we have to convince donors of three things: that the LPPa is a worthy cause, that the LPPa can pick good stocks, that the LPPa can administer its own stock portfolio.
As time goes on and more the party generates more funds from membership drives, 1788 Society and so on, the party could add another mutual fund for more diversification, or start picking individual stocks. But for now, keep it simple, easy to market and easy to administer.
Money Market fund recommendations: They are all pretty much the same. Shop around for one with a low initial investment (below $1,000 if you can find one). Also look for one which will let you write checks for as low a minimum amount as possible. Try to get one that will let you write checks for $500 or less. I have the Valu Line Cash Fund personally, but it would be best to choose a money market fund from the same fund family as the mutual fund. This makes it easier to transfer funds between the two accounts, and the party Treasurer will get one statement a month.
Mutual Fund Recommendations
It may be best to invest in an index fund which has low management fees because it mirrors the Russell 3000 index almost exactly. This will rise and fall with the index chosen. It is hard to beat the market long term. Most stock investors fail when they attempt this.
If I had to pick a mutual fund, I would go with Fidelity Value Fund (FDVLX). I have been investing in this fund since 1999. I have invested in $500 to $1,000 increments over the months and years. This is a value fund, so it buys stocks that selling for a low price to earnings ratio. Some stocks are currently out of favor with investors but have solid fundamentals. This fund favors capital appreciation over dividends.
FDVLX's yields were:
3.1% in December
13.9% in 2006
14.3% in 2005
18.5% for the past 3 years
14.9% for the past 5 years
All this with a beta of 1.10
(the stock market as a whole is by definition 1.00 for variability)
Just look under www.fidelity.com
Plus, it really didn't sink too much during the 2001 stock correction, since it was a value fund to begin with. The stocks were bought low to begin with. When the stock market dropped, they had a lot of new value plays to pick from.
Tim Crowley,
MBA, Katz Graduate School of Business 84-85
Past results are not an indication of future results.
Actual mileage may vary.
1 Comments
Printer Friendly Version
Top of Page
|
