The Importance of Investment Policies

5 Steps for Nonprofits to Develop a Wise Investment Policy

Nonprofit boards have a fiduciary responsibility to protect the organization’s assets and ensure that they’re used to further the mission. 

Often, an important part of the board’s responsibility is deciding how to invest the nonprofit’s cash. That requires implementing a sound investment policy that balances three competing interests:

  1. Protecting the value of invested assets
  2. Growing the assets
  3. Maintaining liquidity, or access to the assets

The following six steps can help you develop an investment policy that is in line with your mission, goals, and growth strategy.

  1. Establish your investment goals and philosophy

Your policy should establish general objectives for your investments, answering critical questions such as:

  • How will proceeds from your investments be used?
  • What is the time frame for your investments?
  • Is there a specific purpose for the investments, such as to support endowments?
  • What is an acceptable rate of return?
  • Which investments are permissible? Are any investments to be avoided due to ethical or other concerns?
  • How much risk is the organization willing to tolerate?

The board itself should provide fiduciary oversight, but that does not mean the board should manage the investments. The policy should clarify who will perform investment management.

  1. Clarify liquidity issues

If you plan to withdraw some of the investment earnings, clarify when those withdrawals will occur and what percentage will be taken out. 

For example, your policy might state that you will withdraw 3% of investment income annually to help with operational expenses.

  1. Establish your asset allocation

How will your investments be divided among stocks, bonds, Treasury bills, and other investment vehicles? 

The specific contents of your portfolio will depend on your desired return and level of risk. Make sure it is clear who will work with your investment managers or consultants to assure that your portfolio is adequately diverse and in line with your objectives.

  1. Decide when you will rebalance

It is important to periodically review and revise your allocation strategy and execution, and rebalance your portfolio. Make sure your policy details when rebalancing will occur—quarterly, annually, when triggered by market events, percentage deviation from the asset allocation policy, or other factors.

  1. Create checks and balances

What will you do if your investment portfolio does not perform as expected, or if your investments are out of balance with your asset allocation policy? Who will decide whether a new investment manager or consultant needs to be hired? 

Make sure your policy clearly defines whether investment performance will be monitored by the entire board or an investment committee. Detail also what will happen, and who will be responsible, if all does not go according to plan.

Need help?

Chazin & Company has helped nonprofits for over 15 years, providing accounting, CFO, and advisory services. Contact us to discuss your financial planning and other concerns and how we can help your organization be more efficient and productive.