The average individual could be forgiven for thinking that nonprofit organizations have nothing to do with the free market mechanisms that otherwise power the American economy. But anyone who actually runs a nonprofit could not. Effective investing is vital for any nonprofit aiming to sustain and advance its missions. Properly managed investments can provide a steady income stream, support operational stability, and fund future initiatives. Conversely, mismanaged investments can lead to serious financial setbacks, jeopardizing the organization's goals and in some cases even its credibility. Here, then, are six of the most common nonprofit investing mistakes to avoid.
1. Failing to Establish an Investment Policy Statement (IPS)
An Investment Policy Statement, or IPS, serves as a foundational document for your organization, outlining its investment objectives, risk tolerance, asset allocation, and governance procedures. It’s your organization’s starting point and lies at the heart of nonprofit investment management. Without a clear IPS, your nonprofit may face inconsistent investment decisions, misaligned strategies, and potential conflicts among stakeholders. Establishing a well-defined IPS goes a long way to ensuring your organization’s investment activities align with your overall mission and financial goals.
2. Ignoring Compliance and Regulatory Requirements
Nonprofits must adhere to specific regulations that govern their investment activities. Non-compliance can result in serious consequences, including the loss of tax-exempt status. Common compliance pitfalls include failing to report all sources of income and not providing adequate explanation for financial discrepancies. Thus, routinely reviewing the regulatory landscape is essential to maintaining your nonprofit's good standing.
3. Overlooking Ethical and Socially Responsible Investing (SRI)
Socially Responsible Investing, or SRI, isn’t the organizational flex it used to be: the concept having become yet another battlefield in the nation’s culture wars. That said, it’s worth taking into account the specifics of your organization’s case. Is SRI fundamentally relevant to your organization’s mission? Do your stakeholders expect that SRI will play a role in your nonprofit investing strategy, no matter how hot the debate gets on social media and in the halls of Congress? When it comes to SRI, keeping an eye on organizational mission and stakeholder sentiment is an important part of nonprofit investment management.
4. Lack of Portfolio Diversification
For any kind of investing, including nonprofit investing, portfolio diversification is a key part of minimizing risk. Relying too heavily on a single asset class or type of investment can expose your nonprofit to market volatility and potential losses. As an example, concentrating your organization’s investments solely in equities, without balancing them with fixed income or alternative assets, has the potential to lead to financial instability during market downturns. A diversified portfolio helps to mitigate risk and promote long-term financial health.
5. Neglecting Regular Performance Reviews
“Set it and forget it.” This approach to investing can be detrimental for any type of investing, including nonprofit investing. Regular performance reviews and portfolio rebalancing can help. In fact, these practices are essential to ensuring your investments remain aligned with your IPS and current market conditions. Neglecting these practices can result in precious asset allocations drifting away from intended targets, exposing your organization to a range of unintended risks or missed opportunities.
6. Failing to Work With Qualified Financial Advisors
Engaging with experienced financial advisors who understand the unique investing needs of nonprofits is essential to the overall success of your nonprofit’s investing program. Attempting to manage investments without professional assistance could lead to financial missteps and, in some cases, even regulatory oversight. Nonprofit investment consulting firms exist for good reason. Make sure to choose advisors with a proven track record in nonprofit investment management and a fiduciary responsibility to act in your organization's best interest. Be wary of advisors who lack transparency, have conflicts of interest, or can’t provide clear explanations of their nonprofit investing strategies.
Nonprofits Need Money, Too
Every organization, for-profit or nonprofit, needs money to run: to successfully answer to its stakeholders and deliver on its expected mission. Effective investing plays a large part in ensuring such success. By avoiding common mistakes—such as neglecting to establish an IPS, overlooking compliance requirements, poor diversification, neglecting performance reviews, or not consulting qualified advisors—a nonprofit can strengthen its financial foundation and keep going strong now and into the future. At Tide Creek
Financial, we help organizations of all kinds, including nonprofits like yours, properly manage their investments so they can do just that. Reach out for a consultation today.
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