Endowment vs Investment Account – Draw me a picture

The other day Sheri Meister and I led a workshop on becoming Financially Fit. During the workshop, we discussed long-term investing strategies. That’s when we got the question again: What’s the difference between an Endowment versus an Investment Account with the Foundation? This wasn’t the first time I’ve answered that question, but I don’t think I’m always speaking the same language so I’ve been thinking of an analogy to help.

Long-term investing is like an apple tree. A few years back, Gus got my wife Betty an apple tree for Mother’s Day. That is a long-term investment. The first few years you just hope it survives (much like an investment). After a while, you get to enjoy the fruit of your patience (apples or investment income). Now here’s the difference:

  • Endowments: If you manage the apple tree like an endowment, you are not allowed to harvest any wood from the tree. You can eat the apples each year, but you can’t lop off a branch to make a walking stick. The tree (i.e. principal) is off limits. You just enjoy the fruit each year.
  • Investment Account: If you manage the apple tree like an investment account, you are to free to harvest the wood as you please. You can even cut the whole thing down. The tree is there for you to do as you wish. As long as you don’t cut it all the way down, you can still enjoy the apples whenever you want.

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