Navigating Uncertainty: How Nonprofits Should Approach Their Investment Programs

In times of economic and financial uncertainty, nonprofit organizations often face difficult questions about how to manage their investment programs. Concerns about grant funding, economic volatility, and shifting financial conditions lead to fundamental questions: Should we adjust our asset allocation? Should we invest more conservatively? Should we create separate asset pools for different financial needs? How do investments fit into our broader financial scenario planning?

The Importance of Long-Term Thinking

While these concerns are valid, it is critical for nonprofits to avoid making reactionary investment decisions based on short-term uncertainty. Investment success is built on strategic discipline—sticking to a well-structured plan rather than reacting to market fluctuations or headlines.

A nonprofit’s investment strategy should be guided by its Investment Policy Statement (IPS), which serves as a roadmap for asset allocation, risk tolerance, and liquidity needs. If an organization’s long-term financial objectives and spending requirements remain unchanged, its investment strategy should not be driven by short-term concerns. Economic and market turbulence is normal, and history has shown that organizations that stay disciplined tend to achieve better long-term results than those that react impulsively to uncertainty.

When Should a Nonprofit Reassess Its Investment Approach?

While the IPS provides a steady foundation, there are legitimate reasons to reassess an investment approach, particularly if an organization experiences a meaningful shift in its financial outlook. Some indicators that a review may be warranted include:

• Changes in Revenue Streams: If a nonprofit is facing potential reductions in grants or donor contributions, it may need to revisit its liquidity needs and asset allocation. Other examples include the loss of a major corporate sponsor or a decrease in membership dues for organizations that rely on recurring member support.
• Shifts in Expenditure Plans: If an organization is expanding programming, undertaking a major initiative such as a capital campaign, or experiencing increased operating costs, its investment strategy should reflect these updated financial demands.
• Scenario Planning Outcomes: Nonprofits that regularly conduct scenario planning can proactively model financial stress situations and evaluate how their investment approach aligns with different possible futures. An updated scenario analysis can provide clarity on whether investment adjustments are necessary.

The Role of Separate Asset Pools

Increased uncertainty may prompt nonprofits to consider whether separate asset pools could improve financial flexibility. Many nonprofits benefit from structuring their investments into distinct pools based on time horizon and purpose:

• Operating Reserves: Typically held in highly liquid investments to ensure immediate financial stability.
• Intermediate-Term Funds: Invested with a moderate risk profile to provide funding for strategic initiatives over a 3-5 year horizon.
• Endowments: Managed with a longer time frame in mind, focusing on growth and sustainability to support future needs.

This approach allows nonprofits to align their investments with different financial objectives and risk tolerances, reducing the pressure to make abrupt changes across their entire portfolio in response to short-term uncertainties.

Maintaining Discipline in an Uncertain Environment

Given today’s uncertainty, it is more important than ever for nonprofits to remain committed to their strategic investment framework. Best practices include:

• Reaffirming Investment Policy Guidelines: Ensuring the IPS remains aligned with the nonprofit’s mission, risk tolerance, and liquidity needs.
• Updating Scenario Planning: Incorporating updated revenue and expense forecasts into financial modeling can help nonprofits stress-test their investment strategy.
• Avoiding Market Timing: Reacting to economic headlines or short-term market movements can lead to costly missteps.
• Maintaining Diversification: A well-diversified portfolio provides resilience against market downturns and economic shifts.

Conclusion: Download Worksheet

Nonprofits must balance financial prudence with long-term investment discipline to navigate uncertainty effectively. While revisiting financial plans and conducting scenario analyses is essential, organizations should avoid reactionary decisions unless there’s a significant change in their financial outlook. Staying committed to a well-structured IPS and maintaining strategic focus ensures resilience and long-term sustainability.

To support this process, we’ve created a Nonprofit Scenario Planning Worksheet to help evaluate financial shifts and align investment strategies with long-term goals. Download below.