Investment Policy for Nonprofit Organizations

Most nonprofit boards know they need an investment policy. Few have one that actually gets used. A gift arrives, the board makes some decisions, and three years later nobody can explain the reasoning, half the members have turned over, and the policy document is doing nothing but collecting dust. That’s the governance gap a real nonprofit investment policy closes.

Why Most Boards Don’t Have a Policy That Works

A sound nonprofit investment policy documents your organization’s investment philosophy, risk tolerance, asset allocation targets and oversight procedures. It becomes the reference point when markets get choppy, leadership changes or a board member questions a recent decision.

The Uniform Prudent Management of Institutional Funds Act (UPMIFA), adopted in 49 states and the District of Columbia, requires nonprofits to act prudently when managing donor-restricted funds. Under ASU 2016-14 terminology, those funds appear on your financial statements as net assets with donor restrictions. An investment policy is how you demonstrate that prudence in practice and protect your organization from governance risk. The Council of Nonprofits recommends that every nonprofit investing any portion of its funds adopt a written investment policy before making those investments.

Build a Policy That Reflects Your Actual Risk Tolerance

Start with the basics: time horizon, liquidity needs and risk tolerance. A true endowment meant to exist in perpetuity allows for a different approach than funds you’ll need to access within three years. Be honest about what your board can actually weather. Some organizations can absorb a significant market downturn without panic. Others can’t, and that’s fine. Your policy should reflect your actual comfort level.

Asset allocation is where strategy becomes concrete. Establish target allocations across asset classes, equities, fixed income, alternatives, cash, with acceptable ranges on either side. When markets move and push you outside those ranges, the policy tells you it’s time to rebalance. That removes emotion from the equation and prevents the well-documented mistake of selling low and buying high.

Spending policies for endowments deserve their own section. Many organizations use a formula based on a rolling average of fund values, typically distributing 4% to 5% annually. This approach smooths out market volatility and works to preserve purchasing power over time. Whatever rate you choose, document the reasoning clearly so future boards understand the intent, not just the number.

Governance Structure Determines Whether the Policy Gets Used

Define who has authority to make investment decisions. Is it the full board, a finance committee or a dedicated investment committee? How often will you review performance? What benchmarks will you measure against? Without clear answers to these questions, a policy document doesn’t produce accountability, it produces a paper trail.

Quarterly performance reviews are the floor, with a comprehensive annual review of the entire policy. Markets change. Your organization’s needs change. A policy that hasn’t been touched in three years probably no longer reflects your current situation.

Consider whether outside investment managers make sense for your organization. Most nonprofits don’t have the internal expertise or bandwidth to manage complex portfolios effectively. UPMIFA specifically permits delegation of investment functions to external agents, provided the board acts prudently in selecting and monitoring them. For a closer look at how governance structures intersect with financial reporting requirements, the IRS guidance on tax-exempt organizations is a useful starting point.

Start Simple, Then Refine Over Time

If you don’t have an investment policy, start with a clear, brief document you’ll actually use. A concise working policy beats a comprehensive one that never gets opened. For organizations with existing policies, a review is overdue if it’s been more than two years. Current considerations worth addressing include rising interest rate environments, the role of ESG criteria under UPMIFA’s charitable purpose doctrine, and your allocation to illiquid alternatives given your liquidity timeline.

Your donors trust you to manage their gifts wisely. A practical nonprofit investment policy isn’t just good governance. It’s how you honor that trust while building financial capacity for your mission.

Our nonprofit team helps organizations develop and maintain investment policies that reflect their mission, their risk tolerance and their obligations to donors. Contact us when you’re ready to put yours to work.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.