What is an investment policy?

When is it advisable to have one and why is it important?

Any organization that invests assets should have an investment policy. This is a document that outlines your overall strategy for investing, your short and long-term goals and the process by which investment decisions are made.

The board of directors needs to make two critical decisions in regard to investment policies: asset allocation (commonly referred to as diversification) and spending parameters. These decisions will provide insights into an organization’s investment practices, its historical return on the investments, its asset allocation and its compliance with the Uniform Prudent Management of Institutional Funds Act (UPMIFA).

Following, you’ll find a list of questions the board of directors should answer in setting investment policies for your organization:

  • Does your organization have an investment policy statement? If so, when was it last updated? Does it meet your objectives and needs? Is it consistent with the UPMIFA and state law?
  • What is your return goal over the period of your plan?
  • What is your current spending rate (percentage of endowment transferred to operating fund)?
  • What is your projected contribution level and liquidity needs?
  • From whom has the organization received endowments, grants and contributions?
  • Is there a board committee responsible for investments? How often does it meet?
  • How do you currently monitor investment performance? What investment performance benchmarks are used?
  • Have you evaluated the cost of your investment managers?
  • What is your current asset allocation in the organization’s portfolio?
  • What are the organization’s attitudes toward risk and returns within the portfolio?
  • Are your investments subject to any unusual regulations?
  • Have you adopted a policy regarding investments in companies that may conflict with your mission?
  • Has the organization transferred cash and investments to any related organizations?
  • Who manages the portfolio and are any unique skills required of the portfolio manager?

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