Nonprofits should ditch the economic crystal ball and establish portfolios that will weather market volatility.
One thing is clear for investors following markets over the last couple of months: Developing an investment plan that depends on successful prediction of short-term gyrations in markets is a dangerous endeavor. The often-derided strategy of “market timing” has long been associated with “retail” investors—individuals caught in the emotions and momentum of market movements—trying to zig when markets zig, but often running into the wrong side of a zag. But are institutions immune from this dangerous temptation? Is market crystal-balling a good idea for nonprofit organizations whose mission is supposed to outlive a market cycle (let alone a mere media cycle)? And what do sustained bear markets mean for nonprofit organizations whose investment portfolio may be needed for the operational expenses that drive mission and purpose? Given the state of current affairs, a few reflections on the best practices of successful nonprofit organizations in the financial stewardship of their assets are in order.
Even before the White House’s April 2 “Liberation Day” announcements that created a five-day freefall in risk assets (until President Trump announced a reversal a few days later), market volatility had escalated substantially. The S&P 500 had been up about five percent in the first six weeks of 2025, and then dropped over eight percent over the next six weeks, all before the April 2 announcement. The subsequent four days saw markets in free fall, headed to a fifth day of violent downside before an intra-day reversal on April 9 stanched the bleeding. Markets since have seen big up and down movements, but have largely corrected around hopes and expectations of less draconian trade actions than those once threatened. As of the time this article has been submitted, markets are enjoying a whole new rally as trade talks with China have taken a turn for the better.
It is not fruitful to focus on the specific causes of this particular episode of market volatility. We must turn instead to the evergreen principles that hold true regardless of actual catalyst. Short-term unpredictability and perpetual vulnerability are permanent conditions of markets. While this particular 20% drop in market prices was catalyzed by unexpected tariffs and a trade war, the last one was set in action by an unexpected global pandemic, with other recent bear market episodes including a European financial solvency crisis, the 2008 global credit crisis, the 9/11 attacks of 2001, and the technology implosion of 2000. In the 25 years of this century, we have seen multiple events lead to violent market distress, all of which were unpredictable in timing, catalyst, and scope. A concise way to put that: unpredictable events that affect markets are, well, predictable.
The old stereotype that “retail” investors do all of this wrong, while “institutional” investors get it right, misses the point that “institutions” are themselves managed by people. The human emotions that make retail investors prone to excessive euphoria on the upside and excessive fear on the downside apply to nonprofit organizations, too. The buffer against this normal state of the human condition is supposed to be a process. Organizations are supposed to inoculate themselves against impulsive decision-making during periods of market volatility by:
- Crafting an investment policy statement that defines their parameters for investment, from defining objectives to setting minimum and maximum exposures for certain asset classes, in line with the organization’s risk tolerance and return objectives.
- Periodically re-balancing the portfolio to ensure compliance with the asset allocation defined in said investment policy statement.
- Removing the fallibility of human emotion from the process by letting the aforementioned IPS do its job, and not seeking to distort the process via discretionary interventions (always driven by emotion and distrust with the process).
These three steps comprise 90% of what is needed for a successful investment process amongst nonprofit organizations. However, (a) immediately raises a pressing question: What does a successful investment policy look like? Is it enough to rely on historical rates of return and assumed volatility to define appropriate weightings? How can nonprofit organizations in 2025 better facilitate the process of crafting an adequate and even optimal Investment Policy Statement? The following three items are worthy of consideration:
- Does the portfolio create the cash flow the organization needs organically, or is the assumption that needed withdrawals will always be funded by portfolio gains? This is the largest vulnerability I see across nonprofit organizations—the assumption that they can live happily ever after off of unrealized gains. Indeed, if the stock market exposure in the portfolio is going up fifteen percent per year and the organization needs to withdraw six percent, this seems like a fair assumption. But what happens when the market is down ten or twenty percent and the organization still needs to withdraw six percent? Selling assets from a declining portfolio turns a temporary fluctuation into a permanent loss. Investors, retail and institutional alike, have been spoiled by abnormally high market returns devoid of organic income creation. Nonprofit organizations would be wise to see dividends and income from their risk assets meet their cash flow needs, recognizing that they receive that fruit even in periods where the tree is not growing! It protects the organization’s portfolio corpus in those periods of market distress.
- Is the portfolio over-exposed to a broad market index (like the S&P 500) that is, itself, over-exposed to a small handful of very popular “big tech” companies? The technology sector used to be fifteen percent or so of the broad market, but now can be over forty percent! It may very well be that organizations have the right exposure to public equities but need to re-think the composition of those exposures (perhaps more selective, active, and concentrated).
- Has the investment policy adequately incorporated alternative investments that have less correlation to traditional stock and bond markets? Are the sources of risk and reward inside the portfolio sufficiently diversified? Private credit, private equity, real estate, and a variety of low-beta investment strategies that reduce volatility can all be suitable mechanisms for controlling emotion in periods of market distress, and advancing the portfolio strategy of the organization.
Nothing will ever fully make bear markets or intense market volatility enjoyable, for retail investors or nonprofit organizations. A portfolio with no volatility at all is a portfolio with no real return at all. However, through the drama of the last couple of months, refreshing the time-tested principles covered herein may be the best trade an organization can make.