One-Pocket Investing Without Compromise
Traditional thinking suggests that in order to do the greatest good, you first need to make the most return – that good work and charitable contribution comes from the overflow of financial return. A lot of people think, “I’d like to make a lot of money and then through my wealth, help others.” Others still, think, “I want to help people and making money is not important” – or, that it is even a negative. We call this type of thinking the traditional two-pocket mindset: assets in one pocket are viewed strictly as income-generating, while the other pocket is devoted to philanthropic purposes.
The problem with two-pocket thinking is twofold:
- It vastly reduces the dollars deployed for intentional purposes beyond profit.
- It can lead to missional conflict.
While the first of these problems is straightforward, the second is easy to miss and its impact can be significant. Because investments have historically been viewed solely through the lens of financial return, they have not been required to consider any sort of social or environmental effect. Therefore in the pursuit of maximizing returns, an endowment or investment manager can often invest in companies or funds that are antithetical to the individual’s or organization’s purpose and values, at times dedicating more capital to antithetical firms than to their entire mission aligned philanthropic causes.
One-pocket investing puts your mission at the center of your strategy and, ultimately, at the center of all of your investments.
By adopting a one-pocket mindset, one can derive appropriate returns without compromising his or her values. This investment approach prescribes that the core values of an individual or organization be at the center of both philanthropic and investment decisions; requiring the inspection of every dollar for “mission fit” prior to its deployment. Mission is thus at the center of strategy, serving as the common foundation as one invests across a spectrum of asset classes. Making both program-related investments and market-rate investments creates a blended portfolio that is maximized for impact and weighted for return. We need not check our values at the door as we work with investment managers or investment committees.
Impact assessment in the context of a blended portfolio is not straightforward. Such a portfolio will include projects that are high in impact and promise marginal or no return, while others will weigh more heavily toward return. With that in mind, a one-pocket mindset should push impact to the forefront as the gravitational lens through which all decisions are made, as fund managers strive to balance the imperative to build a sustainable strategy or achieve their mandated return.
Our new website and our new graphic (below) represent this approach. Unlike the historic spectrum developed by FB Heron that shows financial rates of return and risk across asset classes (the literal ways an organization might invest), this graphic places dimension, movement, and communities/people/mission at the center. They become the gravitational pull and determinant for the type of capital, return targets, impact targets, and so much more.
When the starting point is building a more creative and inclusive economy as well as developing a strategy that supports it, you would be surprised at the amount of creativity that occurs in figuring out how to accomplish this goal while also generating the desired, blended return. Start with your vision and develop your strategy from there. Remember, capital has always been a tool — it’s a means to an end. So if your end goal is to live comfortably, you can also think creatively about how to do that while supporting people, communities, and the environment in ways that matter to you. If the end goal is to create greater opportunities for others or reduce global warming, you need not immediately jump to charitable ideas or approaches.
By having a one-pocket mindset, you can properly manage money as a tool to accomplish your vision and goals. No doubt your blended portfolio will include philanthropic organizations and community lenders in addition to non-concessionary fund managers or direct investment strategies or real estate and stocks; but if you apply a one-pocket mindset, the starting point will be accomplishing your purpose. Then begins the real fun: crafting a capital strategy that supports that!