financial markets

  • Your Foundation’s Long-Term Investment Success Tied to Your Risk Management

    Many elements affect the success of your endowment over the short term. Quality governance, leadership, and fundraising are among the most obvious. However, when looking at your endowment growth over longer periods of time, what counts is how it fares during downturns that regularly hit the financial markets.  

    It is no surprise that healthy financial markets put the wind at the back of your endowment sails. Advancing stock markets drive your endowment asset levels higher, and usually prompt increased donation flows — a perfect combination for success. In fact, during most bull markets the average foundation results are quite similar. It appears that the rising tide does, in fact, lift all ships in the endowment world. 

    Fortunately, most sophisticated endowments usually have 60-70% of their assets invested in the stock market during most of, if not all of the time. When one considers that the average bull market lasts 7-9 years and has returned investors 200%+ during most of those periods, it is easy to see why the average endowment enjoys success when the good times roll. 

    But it also appears that most endowments lose in a similar fashion when the proverbial “music stops.“ In fact, during market declines similar to 2008-2012, the majority of endowments lost significant value, in some cases as much as 50%. As the stock market tide pulls back, most endowment ships take on water! 

    Such market swings create more havoc than you may think. The negative impact of substantial stock market declines has a profound effect on the health and even the longevity of your endowment assets. This is mainly due to what we call the “ugly math” of big investment losses. 

    A 50% decline in the value of your endowment requires a 100% upward swing in the market to just get back to where you were.  (Think of it: if $100 loses 50%, down to $50, it takes a 100% gain to recoup to $100.) And this ugly math is compounded by your need to continue making withdrawals from your endowment, thus further depleting your principal during a down stock market cycle. On average it takes 6-7 years for stock markets to fully recover bear market losses.

    The moral of the story is this: you need appropriate risk management tools that prevent substantial losses and ugly math.

    No one can predict with accuracy when the next bear market will ravage stock markets, but committees can prepare for their inevitable arrival by having a few important policies and using certain tools. Here is a breakdown of four things you can do: 

    1. First, you need a finance committee who is not tricked by their own human nature or lack of knowledge when it comes to market history. Often committees can be prompted by current stock market strength to become overconfident about future stock market advances. They let the endowment remain inappropriately over-weighted in stocks – at just the wrong time.  This type of behavior is why the human brain isn’t great at investing and is one of the reasons that a strict, well-written Investment Policy Statement should be in place and adhered to.  
    2. Related to this, be sure your Investment Policy Statement specifies your endowment’s maximum stock exposure—and then adhere to it.  This policy should allow the investment manager to be significantly less exposed to stocks in bad markets – which I call “active asset allocation.”   
    3. Use “sector management,” by which I mean pay attention to the individual stock market sectors, which move differently.  There are periods of time when certain sectors of the stock market experience above-average growth to a point of dangerous valuation, followed by a crash. Tech stocks in 1999 (which later crashed) are a good example. Committees and investment managers should review their investment portfolios for those areas that have become significantly overvalued and reduce exposure to avoid catastrophic declines in those sectors. 
    4. Lastly, if you follow my advice and only invest in individual securities (individual stocks and bonds from around the globe), be sure to use “stop loss orders” which help prevent a huge loss in any one investment, sector or the whole portfolio. Stop loss orders automatically sell a stock if it declines by a certain specified amount, thus keeping your endowment away from catastrophic loss.

    No one knows when the next bear market will occur – but given how long it has been since the last, many smart forecasters think sooner than later. If there were ever a good time to get serious about risk management, the time is now by following these recommendations. Let’s make sure that when the next bear market is at your doorstep, you are prepared to weather the storm and make your foundation sustainable for many lifetimes!


    The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.

    This book walks you through the basics and best practices of what you need to know to be successful.

    Order your copy today on Amazon



  • Spending & Investment Policy Statements

    Keys to a Sustainable Endowment 

    The management of nonprofit or foundation assets can be a challenge. These are unlike managing family wealth due to the need for endowment longevity and the regular withdrawals usually made.

    Ideally, a foundation’s assets should grow beyond many lifetimes and allow for distributions of approximately 5% annually for most nonprofits. If the world could depend on financial markets consistently delivering returns in excess of 5%, or your donations exceeded this figure each year, managing these important assets would be quite simple. However, financial market returns are seldom consistent and can sometimes deliver losses rather than gains. Furthermore, in periods of financial market declines, your donations often decline or disappear altogether as donors tighten their own pocketbooks. 

    So how does a foundation attempt to bring consistency to the challenge of growing your assets, making annual withdrawals, and creating a sustainable endowment?

    The first step to meet the challenges of managing endowment assets lies in having a well-conceived, written Investment & Spending Policy Statements. These documents serve as the rulebook for your finance committee. They should be packed with all the details about how the foundation’s assets will be managed. These policies should be written to assist the finance committee and board not only in your quest for asset appreciation but managing risk. 

    A well-written and defined Spending Policy will include the goals of the foundation, the purpose of grants you make, and a statement of your long-term targets for grant spending. The policy should also include formulas to be pursued to “smooth out” your annual distributions based on recent year’s investment returns as opposed to using an absolute or fixed grant withdrawal rate that may have no connection to the growth or decline of your endowments assets. 

    For example, by using a moving average of recent annual returns, foundations can reduce the risk of overspending in any given year. Once the spending policy is established it should be reviewed and updated at least annually.

    The Investment Policy Statement is a document that assists the finance committee in meeting the spending policy guidelines while managing investment risk – key issues for fiduciaries. All too often foundations and non-profits run afoul in their management of risk. A well-written Investment Policy will instruct the committee on the guidelines to be followed to avoid taking on too much risk. At the same time, the Policy needs to spell out the upper limits of investment risk to meet long-term objectives. Too little risk can often result in below-average returns that equally limit your goals.  Risks need to be balanced. 

    The Investment Policy document will also define the goals of the foundation and all of the important factors that affect the investment of the assets. This will identify the foundation’s risk profile and growth targets, the types of investments allowable, the investment manager selection, guidelines for asset allocation ranges, and risk management strategies to prevent catastrophic loss. 

    In recent years, many foundations and non-profits have also added into their Investment Policy statements of environmental, social and governance (ESG) constraints. When completed, your Investment Policy thus serves as an important guide to reduce and manage risk, meet performance objectives, and fulfill the committee’s fiduciary duty.

    Today, more than ever, there are significant risks in global financial markets – many that we may know about, but more which we are unaware of. Though no one can predict with accuracy the outcome of future market returns or risk, a well-written Spending &  Investment Policy Statements will help your nonprofit’s finance committee to manage its way through up and down market periods and ultimately create a long-surviving, sustainable endowment.


    The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.

    This book walks you through the basics and best practices of what you need to know to be successful.

    Order your copy today on Amazon