Even small nonprofits often have endowment funds invested to sustain long-term work toward the cause for which they were founded. Large nonprofits typically have a significant source of their annual revenue generated by earnings off of investments. So when the market begins to jump around, as it has done since the middle of the summer, nonprofit leaders begin to get nervous about what downward market trends might do to their revenues. This induces some to pull their funds from the markets, or hesitate putting funds into the markets.
Downward markets trends tend to cause no small amount of panic. However, sound financial management suggests that there are four things we can do intentionally, and four others we can avoid, that will strengthen our organizations' financial health, and ride out downturns in the markets.
- Do: Follow your Investment Policy Statement (IPS), even in a market downturn. An IPS specifies the investment objectives, who is responsible for achieving those objectives (and who is responsible for monitoring), asset allocation, diversification, rebalancing, and so forth. Rebalancing should typically take place on a regular, predetermined basis, rather than at the whim of the managers.
- Don't: Try to time the market. In the moment, it's never clear where the market bottom is, or its top. In the long term, markets show trends; in the short term, they're a little (a lot?) crazy. If people could predict where the market was going to go in the short term, a lot of people would be making a lot of money. Most people want to sell during a downturn and buy as the wave rides higher. The problem is, that for most people, this means buying high and selling low, which is just the opposite of what would create a strong return. The best option is to buy and sell on a regular basis, according to the IPS, as the budget dictates, taking advantage of the lows to buy more shares, and taking advantage of the highs to gain more appreciation.
- Do: Maintain a cash reserve large enough to sustain your organization through a short-term dip in the market, to prevent having to sell securities low, if at all possible. Once the markets rebound, replace the cash reserve.
- Don't: Focus too much investment in one type of security, or one sector of the market. Diversify. Chasing hot stocks does not typically work for funds that expect to remain in perpetuity.
- Do: Allocate assets based on risk tolerance and goals. Can your organization handle the risks associated with the potential rewards of investing? Remember, too, that inflation is a risk - and that securities that offer returns below the rate of inflation are actually losing buying power.
- Don't: Rebalance based on short-term swings in the market. Set a time window, and asset allocation variance window, and stick to it.
- Do: Make sure your organization maintains compliance with the Uniform Prudent Management of Institutional Funds Act (UPMIFA) in a down market. UPMIFA requires that the long-term purchasing power of a fund be maintained, not just its historical dollar value. Prudence (the P in UPMIFA) requires sound judgment in a market downturn. The law requires a seven-point test for prudence. (Ohio's version is here, which matches UPMIFA Section 4(a), applicable in all states (and DC, and USVI) with the exception of Pennsylvania.) We have helped organizations implement UPMIFA. We'd be glad to help.
- Don't: Panic. Take a deep breath. This, too, shall pass.
These do's and don't's will help sustain your organization's financial health in a market downturn. Taking a step back from the day-to-day headlines, looking at the long-term trends, and focusing on your organization's mission will help get you through the days when the market seems crazy. We're in this with you!
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This article is for informational purposes only and does not constitute an offer or solicitation to sell shares or securities. Design Group International and its associated consultants are not brokers, dealers or registered investment advisors and do not attempt or intend to influence the purchase or sale of any security.