The means of a successful, mission-fulfilled organization starts with its board and subcommittees. The knowledge you and your peers bring to the organization is what drives change in your community. And when the financials of an organization are the catalyst for turning ideas into meaningful action, it’s helpful for everyone to have a pulse on what can impact funding in the year ahead to proactively plan.

Here are four important monitoring points and why they should be on your radar today.

Monitoring Point 1: The Economy

Why now? Will we see a soft landing? Investors have been grappling with this question throughout 2023 – whether the Federal Reserve can bring interest rates down without prompting a recession. This narrative has seen a notable rebound for stocks, but it hasn’t been without volatility.

The Federal Reserve, which maintains control over short-term interest rates, has stated that its primary goal right now is to fight inflation, but the rapid rise in interest rates over the past year and a half in pursuit of that goal is bound to have further effects than have been felt thus far.

The economy and employment have been resilient to date, but history (as well as some of the underlying data) suggests this balancing act may not last forever. The Fed has never brought inflation down from the levels we’ve seen without eventually causing a degree of economic hardship (e.g., a recession), and because the impact of higher interest rates tends to act with a lag, we may see more economic headwinds appear suddenly even without further rate hikes. The interplay between inflation, interest rates, and economic growth will be an important monitoring point and are worth evaluating now in the context of your current investment approach.

Monitoring Point 2: Bond Yields

Why now? Rising yields were center stage in 2023. Where they go from here is an important monitoring point in 2024. One of the most fundamental aspects of investing a non-profit portfolio is finding the proper balance between long-term capital growth and preserving assets to fund ongoing withdrawals.

This is a classic investment tradeoff – growth vs. stability. Investors should ask themselves: what is the combination of assets today that best fits the balance that we’d like to achieve? The biggest difference today, compared to the past 15 years or so, is that we have not seen fixed income yields this attractive since before the financial crisis of 2008-2009.

Higher yields imply higher expected future returns, although not without risk. Yields could potentially still move higher, causing current bond values to fall, but given such a meaningful shift in the balance of interest rate risk over the past year or so, it makes sense for non-profits to reevaluate the impact of higher yields and ask themselves if their current portfolio guidelines still make sense. Again, it all comes back to finding the proper balance. Most non-profits will still have a need for growth-oriented assets such as stocks, but fixed income has become a relatively more attractive option than it has been in recent history.

Monitoring Point 3: Alternatives

Why now? Alternative investments seek to provide differentiated sources of return, income and diversification compared to traditional securities such as stocks and bonds.

There are many different types of alternatives, each with their own unique attributes – and, as with any investment, potential drawbacks. Such drawbacks can include lack of liquidity, limited access, and higher costs. With long time horizons and absolute return goals, non-profits can be good candidates to consider alternatives, after careful analysis.

First, does the allocation you’re considering improve the likelihood of reaching your goals? The future is unknown, but by considering a range of scenarios, both good and bad, non-profits can assess whether the benefits are worth the costs. Second, consider that non-profits have more choices today for where to allocate assets than they may have had 10-12 years ago, when many institutions first began to allocate more heavily to alternatives. As explained above, higher fixed income yields make a big difference in the math of how a portfolio might be optimally allocated. At the least, alternatives are a market opportunity worth understanding and evaluating as non-profits carefully weigh all their options.

Monitoring Point 4: Donor Capacity

Why now? 2022 was a rare year where total donations fell compared to 2021. It will be interesting to see how donors have responded in 2023. Donor capacity (an estimate of how much donors can give if they choose to) can evolve over time depending on how confident people feel financially.

On the one hand, lingering inflation, a potentially slowing economy, and a stock market still recovering from a challenged 2022 are all headwinds that could lower donors’ financial confidence. On the other hand, a strong job market, higher earnings on savings, and the cumulative effect of wealth built up over the COVID era could lead some donors to increase their giving.

There is no single factor that impacts the decision to give, but monitoring the financial conditions of donors over time gives you the opportunity to tailor a message that will resonate. This is an important tool for building trust and cultivating strong donor relationships over time.

It’s worthwhile to add these monitoring points to the agenda of your next board meeting as a way to level set, gain an understanding of the economic environment that’s ahead, or brainstorm ways to overcome any potential hurdles for your organization. If, at any time, your board needs a deeper understanding of any of these monitoring points, we’d be more than happy to meet with you.

The information in this paper is not intended as legal or tax advice. Consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation.