The Ultimate Guide to Nonprofit Investment Strategy

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Published:

June 24, 2023

Last Updated:

July 5, 2023

As a nonprofit organization, you’re always looking for ways to make your money go further. One way to do this is by investing, which could help drive long-term sustainability for your nonprofit if done correctly.

A well-managed investment portfolio can help bolster your budget, generating additional funds to support your programs and initiatives.

Yet many nonprofits are hesitant to invest because it’s seen as risky—but it doesn’t have to be.

In this post, we’ll explain everything you need to know about nonprofit investing, including why it’s important, nonprofit investment strategies, and more.

Importance of an Investment Portfolio for a Nonprofit

Investment Portfolio

To be successful, a nonprofit should have multiple revenue streams.

Individual donations, grants, and fundraising events are common ways to raise money for a nonprofit, and in many cases, organizations stop here if they are able to meet their operating costs and build a small reserve.

However, it’s a missed opportunity if your nonprofit organization doesn’t explore investing.

Putting a portion of your nonprofit's assets into investments like stocks and bonds, CDs, and money market funds can help that money work for you, growing in value when you’re not using it.

Investing for nonprofits is a great way to build long-term sustainability and financial stability.

Your investments can help your organization build long-term financial stability because, when done correctly, they make money. You can gain passive income through your investments, generating additional funds to help support your programs and initiatives.

When you’re able to increase your revenue, you’re able to accomplish more and increase your impact. It’s a win-win for everyone involved. Opening up an investment account also provides new opportunities for giving as some donors may opt to give you gifts of stocks or bonds instead of cashing them out and giving you the value.

St. Jude does a great job of walking its donors through how to donate stock to their nonprofit organization, as well as sharing the tax benefits of doing so.

St. Jude Children's Research Hospital

Still, there is some risk involved in establishing a nonprofit investment portfolio, which is why some nonprofits opt to refrain from investing.

Some fear that if they make the wrong investments, their money will be gone. Others would rather have access to the cash on hand in the case of an emergency.

Both of these fears are legitimate, but the benefits of nonprofit investing far outweigh the cons. And there are professionals available who can help you through the process, walking you through how to invest, what to look for, and more.

Also, you can lean on your Board of Directors for guidance if you prefer to keep your investing in house. They may have experience with investing or running organizations that rely on investments.

As you invest, it’s important to be realistic. You’re not going to put in $1,000 and get $10,000 overnight. Instead, you need to remember that investments typically take time to grow, so you want to be patient, check in on their progress, and make adjustments as needed to reach your targets.

You do not want to have to access those funds unless it’s an emergency to allow time for your investments to grow. Additionally, investments require effort to liquidate in order for you to use them, so if your nonprofit has a tight annual budget, it may not be the best time to invest. If that’s the case, that’s okay! You can always invest at a later date.

Ultimately, your investment portfolio is a great way to scale your nonprofit organization, raising more money to increase the positive change you can make in the world.

Steps to Nonprofit Investing

Steps

Investing as a nonprofit comes with its own considerations to ensure you’re compliant and can maintain your tax-exempt status from the IRS, and there’s a lot of pre-work that you should do in order to make sure you’re starting off on the right foot.

As you consider investing, make sure you make prudent and informed choices to protect your organization’s long-term health, as well as get all financial decision-makers, both internal and external, on the same page.

At a high level, there are just four steps to nonprofit investing.

  1. Create an IPS
  2. Open a Nonprofit Investment Account
  3. Fund the Nonprofit Investment Account
  4. Maintain the Nonprofit Investment Account

Of course, there are many nonprofit investment strategies and action items within each step, which we’ll go over in depth.

You can also consult with a financial professional that specializes in nonprofit investing to help you on your journey if it seems overwhelming. These professionals are well-versed in all the requirements. You have options when it comes to making the most of your nonprofit investing.

1. Create an IPS

First off, what is an IPS?

An IPS, or an investment policy statement, is your investment plan. It serves as the guiding principle for all your activities and includes important information about your organization, goals, investment considerations, measurement and reporting information, and more.

If you are working with outside counsel, you will collaborate with the portfolio manager to create this document. If not, you can collaborate internally to decide on your investment strategy. Your organization’s leadership, including the Executive Director, would put this plan together before presenting it to the board for approval.

Your IPS is the single most important document for investing at your nonprofit because it includes everything you need to know about the how, what, where, when, and why behind your investment choices.

The more thorough your IPS, the more clarity you will have on how to execute your nonprofit investments to reach your financial goals.

Here are some ideas of what to include in your IPS:

Background Information About Your Nonprofit

This should include an overview of the organization, including your mission and vision.

It should also have the names and contact information of those who are involved in the oversight and management of your nonprofit’s investments. These are typically the board members, Executive Director, or finance committee members, depending on the organization.

As you create this section, include information that would help inform someone taking over your portfolio of who you are, what you stand for, and how to get in touch with the financial decision-makers at your organization to start.

Goals

Before you move any money, you need to start by assessing your goals. Ask yourself some critical questions to help uncover your motivations so that you can come up with clear goals for your nonprofit investment strategy.

  • What do you hope to accomplish by investing?
  • Do you have primary objectives? Secondary goals?
  • When do you want to see a return on your investment?
  • Are you trying to provide an opportunity for donors to contribute stocks, bonds, and other investment securities to your organization?
  • Do you have enough money in reserves to fund your daily operations, as well as access to an emergency fund?

The answers to these questions should inform the basis of your goals. For example, let’s say you hope to eventually have passive investment income. A sample goal could be to achieve $50,000 in passive income by 2030. The more specific you are, the better your goals will guide your investments.

Also, as you set your goals, you want to think about any risk/return objectives that you may have. You want to be able to set your ideal long-term rate of return and the risks you’re willing to take to make them happen.

Often, the higher the risk, the higher the return; however, that also means a greater risk of failure, which means you could be left with nothing.

Nonprofits tend to be more conservative in their investments, which means you should expect to see slow and steady growth in your investment portfolio’s value, but your goals can inform your nonprofit investment strategy.

Your goals are unique to you and your organization, so make sure you get a clear understanding of them before you start to invest your resources. Moving too quickly without a plan will only result in a financial loss for your organization.

Investment Requirements

The investment requirements will help guide what kind of investments you can make within your portfolio, so it’s very important that you spend time considering the following elements.

  • Regulatory and tax requirements to protect your 501c3 status.
  • Investing time horizon, or the time you will need before you’ll want to access your money. This will determine what kind of investments will work best for you.
  • Portfolio liquidity needs, which is how much of the investments you want to be able to convert quickly to money without losing its value.

Remember, you can always adjust as you go to find the right stride for you and your organization.

Parameters

Once you know what your requirements are, it’s time to consider how you’d like to meet those with your asset mix. Typically, there are five asset classes that you can choose from.

  • Cash and cash equivalents, which are investments that give you quick and easy access to your money. This could include high-interest savings accounts, money market funds, and guaranteed investment certificates.
  • Fixed-income securities, which are loans where you purchase a bond, and in exchange, you get your initial amount back with interest.
  • Stocks and equities, which allow you to partially own a part of a company, including its gains and losses.
  • Investment funds, which is an alternative to investing in individual companies. Instead, you invest in more than one type of investment across asset classes.
  • Alternative investments, which are other types of investments that don’t fall into those traditional buckets like real estate, cryptocurrency, commodities, and more.

Good investment portfolios typically include a mix of assets, as well as an outline of what your target allocation in each class should be. This will help guide how your portfolio is invested, and it will be the start of an endowment at your organization.

Metrics

Lastly, you want to include how you plan to measure your portfolio’s success, including reporting guidelines. Having metrics in place helps make you more agile and aware of your portfolio’s performance. You’ll be able to address gaps quicker, protecting your financial health.

Are there benchmarks you can set to help you measure success over time? For example, do you want to make $5,000 a quarter? Then, you’ll want to set up bi-weekly reports to track performance, including if your rate of return is projected to meet your goal. If it’s not, you can make adjustments.

Outline your metrics, reporting frequency, and adjustment plans to ensure you stay on track.

Final Reminder

Remember, what you include in your IPS depends on who plans to use the document. If you plan to invest yourselves, you may not need to include information about your organization.

However, if you work with a financial advisor, this information will be critical as multiple people may end up managing your portfolio, and you want to be sure your investments always align with your mission and vision.

This document can be adjusted over time, but it’s critical to set a clear plan in place from the start so you don’t make risky investments.

2. Open a Nonprofit Investment Account

Now that the plan is in place, you’re ready to open your nonprofit investment account!

There are different options available, so you’ll want to make sure you choose the right one for you. Examples of where you can open investment accounts are as follows:

  • Banks, which is the most traditional route. You deposit your money at a bank, and you get it back at a slight interest.
  • Wealth advisors, which are financial advisors who can help you invest your funds based on your IPS.
  • Investing apps, which allow you to invest your funds on your own.

Which one you choose depends on your preference, but know that each comes with different fees, investment options, and more. For example, you may get better customer service with wealth advisors because their salary is tied to your account. They often get a percentage of the assets they manage, whereas, at a bank, you are one of many customers.

You get to keep all your profits if you do it yourself, but you may make some missteps a more seasoned advisor would not have made. It’s a trade off, but there are pros and cons to each option.

You may need to include documentation to prove your 501c3 status, including your articles of incorporation and your 501c3 determination letter. You’ll also need to include information for authorized agents on the account, which are those who can make changes.

It may make sense to work with a professional if you have no subject matter experts on your Board of Directors. That way, you’ll avoid accidental missteps to ensure that you’re compliant and don’t lose your tax-exempt status.

3. Fund the Nonprofit Investment Account

Once the account is open, it’s time to fund it.

Transfer the cash or other assets that you want into your account. Typically, you can set up an electronic deposit to make it easier to transfer assets between accounts. This includes making deposits and withdrawals.

Depending on the account, you may also be able to accept stock contributions. These are typically gifts from donors, and you’ll want them to include their account’s custodian, the depository trust company’s clearing number, account name, and account number. This will help facilitate a seamless deposit into your account.

As your account is funded, it will now be invested as you outlined in your IPS.

4. Maintain the Nonprofit Investment Account

If your investments are automated or you have a financial advisor running your nonprofit investment account, it can be tempting to set it and forget it. However, you do need to maintain the account to ensure it’s performing as you expect.

Keep an eye on those metrics that you outlined in the IPS and review your reporting to make sure it's performing as expected and meeting projections. If it’s not, make adjustments to your nonprofit investment strategies. It’s important to play an active role in your account’s success.

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Key Investment Considerations for Nonprofit Organizations

Gold Key

Investing as a nonprofit comes with its own unique set of challenges and considerations. Here are three considerations to keep in mind.

Tax Exemption Status

As a 501c3, you are subject to additional scrutiny to maintain your tax-exempt status, so you have to be careful.

According to the IRS, net earnings cannot benefit private shareholders or individuals. That means your earnings should be reinvested into the organization, funding programming, operations, and other elements in support of your organization’s mission. They should not be awarded to the board or Executive Director as a bonus or reward.

Additionally, as you invest, you want to keep in mind that the income tax exemption also applies to your investments. That means you can invest as a tax-exempt entity, so you won’t have to worry about claiming capital gains or ordinary income at the end of the year.

This is why some donors may opt to donate stock vs. other funds as it provides a seamless tax incentive. Overall, you want to be careful with how your nonprofit investment strategies are set up to ensure there are no accidental penalties that could result in a loss of status.

Investing Inspired by Your Mission

As a nonprofit organization, you need to stay true to your mission, vision, and values in all you do.

That also includes your investment portfolio. For example, if you are an organization that funds lung cancer research, you should not invest in tobacco companies because it goes against everything you stand for.

It doesn’t always have to be that extreme, but as you invest, make sure that you are making sound and ethical choices. Check into how the company treats its people and if their values align with yours. If not, you may want to avoid investing with them. You shouldn’t compromise your values in order to make a profit.

Balance Risk and Return

Investing for nonprofits can seem intimidating, but when you think about the benefits of doing so, it’s really riskier to not invest if you want to secure your organization’s future and have the extra funds to do so.

Before you make any investments, you need to balance the risk and return. Many nonprofits opt for more tried-and-true investment strategies backed by big banks or financial advisors. They may invest in more well-known or established companies than up-and-coming rising stars.

This may mean the returns are more modest, but the risk is also low. It’s less likely that you will lose your money than if you partake in a more risky venture like cryptocurrency or NFTs.

Because investments are not a guarantee, many nonprofits opt to work with professionals to help guide their choices and maximize their returns. Nonprofits may not be about making a profit, but the more money you can generate, the more good work you can do.

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Wrapping Up: The Next Steps

Investment

Nonprofit investing may look similar on the surface to traditional investing, but there are several considerations that are important to keep in mind. As a 501c3, you don’t want to do anything that could jeopardize your status, and that includes keeping a close eye on your investments.

As you start out, you want to draft your IPS, which will help you steward your investments. Once you have that in place, you can open the right account for your organization and get started!

There are wealth management professionals who know the ins and outs of nonprofit investment strategies, so don’t be afraid to seek out professional help.

Regardless of how you invest, it’s important that you do. It’s a great way to generate passive income, protecting the long-term health of your nonprofit so you can continue doing what you do best: making a difference.

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Instrumentl team

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