Smart Investing for Not-for-Profits: Managing Reserve Funds and Endowments

Investment policies aren’t only relevant for nonprofits with millions of dollars. If your organization maintains reserve funds—whether for unexpected emergencies or achieving long-term objectives—having a clear investment policy is essential. These policies help guide the responsible management of reserve funds, ensuring they serve their intended purpose while mitigating investment risks.

Creating investment policies begins by defining the purpose of different funds or investment pools. Some not-for-profits maintain only one investment pool, lumping current operating funds with reserve funds and combining restricted with designated and short-term with long-term funds.

If this is the case with your organization, you need to differentiate these pools according to their purposes, time horizons and any restrictions or designations that may apply to them. To ensure you're properly categorizing the funds, consult legal and accounting documents, such as your organization's bylaws, donor agreements, board minutes and cash flow models.

Establishing your organization's investment policies will first require that you identify the objectives, unique circumstances and the oversight responsibilities that you will require within your not-for-profit. After you've identified separate investment pools, create written investment policies and guidelines for each one. A pool's purpose and time horizon will be critical.

Short-term pools are used to pay operations-related bills, and these funds may be needed at any time on short notice. For such a pool, your investment objectives should include safety, liquidity and, possibly, yield. Typically, the safest short-term investments are money market funds, Treasury bills, certificates of deposit and short-term, high-quality bonds.

Long-term pools include endowments, contingency reserves and funds designated or restricted for making major improvements. Here, the investment objectives generally are growth and capital preservation, which may be achieved by investing in high-quality equities, longer-term bonds and some short-term investments. If you're seeking a constant income stream, you may want to stagger bond maturities so that an interest payment comes due every month.

For all of your pools, consider whether you want to prohibit certain investments that conflict with your not-for-profit's mission or a donor's wishes. A cancer research charity, for example, might ban tobacco and chemical company stocks from its portfolio.

In addition to identifying each pool's specific return objectives and permissible investments, address each asset class's minimum and maximum allocations. For instance, your investment committee may decide that equities should represent no less than 30% and no more than 60% of the total investment pool.

Such asset allocation guidelines are important when determining a portfolio's potential risks and returns. Studies have shown that asset allocation decisions account for more than 90% of a portfolio's total return — far exceeding the importance of individual security selection.

You should include in your nonprofit's portfolio different assets whose price movements generally don't correlate. For example, intermediate maturity bonds and mortgage-backed securities do little to diversify a portfolio because their price movements usually are related to interest rate movements. However, intermediate maturity bonds typically have a low correlation with the price movements of common stock, so combining the two in a portfolio can reduce overall risk.

If your board or investment committee includes knowledgeable investors — for example, CPAs, bankers or financial planners — you might allow them to make asset-allocation decisions. Otherwise, work with a professional money manager, at least initially. Once you've chosen investments, your nonprofit may be able to monitor performance, adjust weightings and make trading decisions on its own.

Larger not-for-profits almost always have a money manager to consult with the group making the final decisions. Note that your investment policies should state who is responsible for and authorized to make such decisions.

In terms of donations, your not-for-profit might also receive gifts that are non-traditional. This is another area where you need to be aware of specific legal, financial, and operational considerations. For example before accepting cryptocurrency donations, you should create a formal policy that outlines the types of cryptocurrencies your organization will accept, how they will be processed, and any limitations or restrictions. This policy should detail how crypto will be managed, whether it will be converted to cash immediately, held as an investment, or used directly for operational funding.

Decide in advance whether your organization will hold the crypto as an investment or convert it immediately to fiat currency. Holding onto crypto could result in substantial gains (or losses), so define your risk tolerance and investment strategy in your acceptance policy.

Don’t wait until your organization receives a major donation to establish investment policies. Creating a strategy now shows financial prudence and ensures you’re prepared to manage larger gifts in the future. With a solid framework in place, you’ll be ready to steward funds wisely, supporting your mission and long-term sustainability when the opportunity arises. Proactive planning today sets the stage for responsible growth tomorrow.