October 26, 2026
Nonprofits invest for many reasons. Some want to generate income to support annual programs. Others are building reserves or managing endowments that may support the organization for generations. Whatever the purpose, investing raises questions that go beyond which stocks or bonds to buy. How much risk can the organization afford? When will the money be needed? And who gets to make those decisions?
An Investment Policy Statement (IPS) helps answer those questions before they become urgent. Part investment guide and part governance document, it establishes how funds will be managed and who is responsible for overseeing them. To help clients, prospects, and others, Wilson Lewis has summarized the key details below.
Nonprofit boards have a fiduciary duty to oversee organizational assets and manage funds prudently. That responsibility applies whether the organization manages a multimillion-dollar endowment or a modest investment portfolio. In either case, clear guidelines help the board make sound decisions about how those funds are managed.
An IPS provides that guidance, both for decisions being made today and those that will come years down the road. It helps keep the focus on long-term objectives, even when market swings tempt the board to change course. And as board members and investment advisors come and go, the organization has a written policy to guide the next decision.
There is also an opportunity to bring the nonprofit’s mission into the discussion. A conservation organization, for example, may favor investments in companies that support environmental goals. A public health nonprofit may choose to avoid tobacco companies altogether. An IPS gives the board a place to document those preferences and make them part of the investment strategy.
The following six steps provide a starting point for writing an effective investment policy statement for a nonprofit organization.
Step 1. Define the Purpose and Scope
What does the nonprofit aim to accomplish with its investments? It may be to preserve operating reserves or grow an endowment that will support the mission for years to come. The IPS should state the intention clearly. Next, identify which assets the policy will cover. A not-for-profit youth program, for example, may have six months of operating reserves and a separate fund for a facility expansion planned in five years. Both may be invested, but each serves a different purpose and carries a different risk profile, which should be outlined accordingly. Nonprofit leadership will also want to review the organization’s budget and gift agreements to determine which funds are available for investment and if there are restrictions in place.
Step 2. Establish Investment Objectives
How much are the funds expected to grow year-over-year? Boards often set a return objective by adding the annual expected spending rate to expected inflation and investment fees. Risk tolerance should reflect the organization’s ability to absorb losses. One nonprofit may be comfortable with a high-growth, high-risk strategy, and other nonprofits may need to be more conservative. Before making a recommendation, nonprofit leadership will want to consider budgeted expenses against all known sources of revenue, accounting for recent uncertainty related to grant cycles and funding.
Step 3. Set Investment Guidelines
What asset classes are permitted and which are prohibited? Investment policies may cover traditional avenues like stocks and bonds. They may also cover less traditional areas like real estate or cryptocurrency. Either way, target allocation should be set within each asset class. Many policies prohibit practices like margin borrowing and limit any single company to no more than a certain percentage of the portfolio. Rebalancing guidelines are helpful as well. They explain when the portfolio must be adjusted. For example, a policy might set a target stock allocation of 60%, with an acceptable range of 55% to 65%. If market gains push stocks above 65%, the investment manager would likely look to rebalance the portfolio within the acceptable risk tolerance.
Step 4. Address Spending and Withdrawal Rules
How much can the organization spend from its investments each year without compromising future needs? If managing an endowment, many nonprofits use spending or distribution rates of 3% to 5% of the endowment’s total value over time to account for market fluctuations. If managing investments related to operating reserves, the target spending rate will likely be higher to cover day-to-day expenses. Each nonprofit is different. The policy should also explain the internal controls required for the approval and withdrawal of funds.
Step 5. Assign Roles and Responsibilities
Who is permitted to make decisions and authorize transactions? To start, the board generally approves the investment policy and retains oversight. Then, a committee is usually responsible for monitoring the portfolio and making recommendations. Additional staff may be assigned to coordinate reporting. An outside investment advisor handles day-to-day management, but again, this manager ultimately reports to the board. Rather than assigning anything to a specific person, it’s best practice to list roles and responsibilities by title or position. This system reduces confusion in the event of an unexpected departure or absence, and it helps set up succession planning discussions as well.
Step 6. Establish Monitoring and Review Procedures
How will investment performance be evaluated? Each funding pool should have a benchmark that matches its allocation. A portfolio with 60% stocks and 40% bonds, for example, might be measured against a blended index with the same mix. Quarterly reports are common for committees, with some nonprofits requiring a full brief for the board. At minimum, the board should review investments and the policy on an annual basis. The goal is to confirm that the investment manager and related guidelines are still a fit for the organization. Many boards schedule the review alongside budget approval, when financial needs and priorities are already on the agenda.
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A written investment policy gives nonprofit leaders a consistent way to manage invested funds through changing markets and board transitions. When reviewing operating documents, many nonprofits seek the expertise of an experienced advisor to evaluate the current investment policy or to help build a new one that fits the current mission and financial needs. If you have questions about the information outlined above or need assistance with another nonprofit tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.