Risk Tolerance and Time Horizon

All investing involves risk. Determining "risk tolerance" is an important part of developing a good investment strategy.

The level of investment risk that can be tolerated is usually related to the investment's anticipated "time horizon", the length of time that an investment is expected to remain virtually unchanged. Longer time horizons generally enable higher risk tolerance as it allows time for short term losses to recover and to realize long term gains.

Before investing in the Foundation's Common Investment Funds, potential participants should determine the investment objective for each other funds and select from among the various Funds offered by the UCF that are most consistent with their long-term objectives. Each UCF Fund has a different investment objective, one that may or many not be appropriate for a participant's funds, based upon that fund's objective.

Generally speaking, investment portfolios containing a higher proportion of common stocks will have a greater potential for long-term growth, while portfolios with a higher proportion of bonds will have a higher potential for consistent current income.

Because of the inevitable daily fluctuations in the market value of both bonds and stocks, the per unit net asset value for eight of the UCF's Common Investment Funds (excepting the UCF Cash and Equivalent Fund) will fluctuate from day to day, sometimes substantially. Participants must be able to tolerate such daily fluctuations in the value of these investments in pursuit of their long term investment objective for their funds. Each of these eight UCF Funds is intended for long-term investment purposes, that is, for investment periods of five years or longer. Investing in these funds for shorter periods of time is considered speculative and is highly discouraged.

The Investment Committee of the United Church Foundation (UCF) has established certain investment guidelines and policies in an effort to minimize the risk of participation in the Foundation's funds. However, a potential participant should be aware that eight of UCF's Common Investment Funds are subject to the risk that stock and/or bond prices will decline over short or even extended periods of time. The three UCF balanced funds are also subject to the risks inherent in attempting to anticipate changing market conditions through a strategy of varying asset allocations, although this strategy operates within the limited range of plus-or-minus 5% percentage points of the target asset allocation for each fund. Investment results in the three UCF balanced funds will depend not only on common stock, bond and cash equivalent returns over various periods of times, but also to a lesser degree on the Chief Investment Officer's (CIO) ability to anticipate correctly the relative risk and performance of each asset class, and make adjustments properly to each fund's asset allocation within the range allowed. While the CIO has substantial experience in this area, history suggests that a successful asset allocation strategy is extremely difficult to implement on a consistent basis.

By contrast, the UCF Cash and Equivalent Fund is designed for those participants who seek a constant unit value (nominally, $1 per unit) and seek only to gain current income at money market rates for relatively short term investments. Income earned from the assets held in this portfolio is distributed daily in the form of additional units or fractional units in each account. Consequently, the Fund's annualized yield will vary from day to day and week to week, generally reflecting current short-term interest rates and other short term money market conditions.

Common stocks, according to one study ("Long-Term Returns," Victor Niederhoffer and Alex Castaldo, 2004), are estimated to provide an average annual total return (price appreciation plus reinvested dividend income) of 9.1% (6.3% real return adjusted for inflation) during the 21st Century.

While this estimated average may perhaps serve as a useful guide for establishing long-term future expectations, it must be noted that over short or even extended periods of time, returns will deviate substantially from this average. For example, the worst single year return in the period between 1926 and 2006 was -43.3% while the best single year return was +54%.

Long-term corporate and government bonds have been estimated to provide an average annual rate of return (price change plus reinvested interest income) of 4.5% (1.7% real return) during the 21st Century. While this average may perhaps serve as a useful guide for establishing long-term future expectations, it must be noted that over short or even extended periods of time, returns will deviate substantially from this average. For example, the worst single year return in the period from 1926 through 2006 was -8.1%, while the best single year return was +42.6%.

The important thing to remember about long term investing in stocks and bonds is that while there are no guarantees, the long term trend has been very positive, delivering significant real returns over the inevitable inflationary losses that eat away at the buying power of all investments, and especially those held in less risky securities.