As nonprofit leaders, raising money and applying for grants is as natural as breathing. In my time as both a director of development and executive director for various nonprofits, fundraising became second nature. For years, I assumed that a great fundraising year translated to solid programs, better outreach, and long-term success.

However, it took many years for me to fully understand the importance of other sources of financial stability for the organization, like the size of the endowment or investment policies that impacted the organization's long-term financial viability.

In truth, a sound investment and portfolio management policy remains critical for nonprofit organizations' long-term stability and viability. Relying solely on donations and grants to keep programs stable without a sizable rainy day fund is unwise, especially during economic upheavals and uncertainties.

However, when it comes to making prudent investment decisions, most nonprofit boards find themselves handicapped, with various regulations and obligations, such as duty of care, donor agreements, and the organization's own bylaws, sometimes hindering efforts in this direction.

Nonprofit directors and board members must understand the widely accepted practices for drafting an effective investment policy. The best investment policies for a nonprofit serve its goals and objectives, incorporating systems and mechanisms to offer protection to boards, which have a fiduciary responsibility to safeguard the organization's finances.

If you're planning to create a new nonprofit or working to ensure an existing organization has the right policies and committees in place, this guide to investment policies for nonprofits is a great place to start.

Creation of An Investment Committee

The policy should ideally initiate the setting up of a committee to oversee the various investment activities of the organization. This committee oversight has to be done while remaining independent of the board, while also remaining accountable to the entire board of directors.

This independence helps protect the board against legal actions while also complying with the extensive regulatory requirements for nonprofits. The committee should have its own charter, which clearly states its role, constitution, powers, and responsibilities, based on which it is expected to conduct business.

Need committee report templates? Check out the Nonprofit Template Library!

Goals, Objectives & Other Considerations

The policy document should summarize investing goals and objectives, including an order of preference. Is the goal to preserve assets from economic downturns and inflation? Or Is it to grow a substantial corpus that can support operations during years where donations and grants fall below expected outcomes?

Goals and objectives depend on various factors, including the nature of the nonprofit, its financial resources, operational constraints, and the prevailing donor sentiments. While it is impossible to have the foresight to accommodate all of this, it is possible to ensure some flexibility to adapt as the times change.

Asset Allocation, Diversification & Risks

With the guiding principles in place, what follows next is a deep dive into assets, allocations, and risk considerations. Here again, many nonprofit boards and investment committees prefer working with outside advisors to minimize the risks and take advantage of specialized advice from experts.

Even while working with outsiders, however, it is the job of the investment committee to ensure that the approach aligns with the organization's liquidity requirements, risk profile, and long-term objectives, among other things. An external advisor can only take the lead once the investment committee sets the stage internally.

The outline of asset allocation, diversification, and risks should also include factors regarding brokerage accounts, the custodian, and banking partners to best achieve objectives. Unfortunately, when it comes to investing for nonprofits, it goes beyond just opening a Robinhood account or the SoFi online investing app, with plenty of regulatory considerations in play.

Performance Management & Reporting

Once aligned investments are underway, the investment policy frameworks, systems, and policies help guide effective performance measurement and standard reporting procedures. The investment committee should regularly report performance figures to an oversight committee within the board.

Usually, advisors and stakeholders measure investment performance against benchmarks, such as the S&P 500. However, depending on the strategy adopted, or the objectives defined, the committee can recommend including custom benchmarks as part of the investment policy for better tracking and measurement.

For example, for organizations that want protection against inflation rates, the annual CPI can be the ideal benchmark, while others are concerned only with outperforming previous years.

Final Words

Every nonprofit, regardless of size or mission, should have an investment policy to guide its long-term financial security. If your organization does not have this policy in place, consider making this a priority discussion at your next board of directors meeting.

And if you have an investment committee that is inactive or unclear on its role, seek the expert guidance of a financial advisor or firm to help them get back on track. The long-term future of your organization depends on it.

Looking for more information on nonprofit policy? Check out this post about the nine types of policies your nonprofit should have in place.

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