Key Takeaways:
- Deciding when to move reserves from cash into a managed investment portfolio is a decision made by the board after careful deliberation, not a threshold crossed automatically at a certain balance.
- Time horizon, purpose of reserves, capacity for risk, and governance needs should all be considered prior to deciding to move cash to a managed portfolio.
- Cash needed to fund upcoming expenses should stay in liquid accounts, while funds that are not needed in the near future are often worth considering transferring to a portfolio.
- Sorting reserves into distinct pools that consider both purpose and time horizon, from operating cash to long-term strategic reserves, can help bring clarity to the decision.
- Moving to a managed portfolio adds governance responsibilities that a board should be prepared to handle.
Educational / General Disclaimer: This article is for informational and educational purposes only. It does not constitute investment advice or a solicitation. Raffa Investment Advisers is a registered investment adviser. Each organization’s financial situation is unique. Please consult with a qualified investment professional before making financial decisions.
Overview
One of the healthiest financial questions a nonprofit or association can face is when to move cash reserves into a long-term investment portfolio. Your organization may have built those reserves through years of operating surpluses, a successful fundraising campaign, a major gift, or careful financial management. However the cash arrived, the same question follows: at what point should cash be moved into a long-term investment portfolio?
Making the decision to transition cash to a managed portfolio is less about a specific dollar figure. For example, a nonprofit with $2 million in reserves may appropriately keep most of those assets in short-term investments if the money will be needed over the next 12 to 18 months, while an association with $500,000 designated for long-term sustainability may benefit from a diversified investment portfolio. The deciding factor should be the purpose the money serves rather than the size of the balance.
If your organization is working to evaluate if it has enough in reserves, check out our article: “Nonprofit and Association Reserves: Are You Where You Should Be?”
When to Move Cash into a Long-term investment portfolio?
A nonprofit should move cash reserves into a long-term investment portfolio once those reserves are set aside for long-term purposes, can remain invested through market cycles, and are ready to be managed under a governance framework rather than simply held for near-term spending. That decision is defined by intent and time horizon, not by reaching a particular account balance. Short-term operating cash is managed for safety and access. Reserves the organization does not expect to spend soon, including money set aside for long-term stability or strategic goals, are the dollars that may warrant a diversified portfolio and the oversight that comes with it.
This article covers four key questions finance committees and boards should consider before transferring cash reserves into a long-term managed investment portfolio:
- How long can our reserve funds remain invested?
- What are the various purposes our reserves are intended to fulfill?
- Is our nonprofit able to take on risk and withstand market fluctuations?
- Are the added nonprofit board governance responsibilities justified?
Taken together, these questions can help turn an open-ended decision into a disciplined one.
Question 1: How long can our reserve funds remain invested?
How long funds can remain invested depends on when the organization realistically expects to spend them, and that horizon should shape the strategy far more than the size of the balance. Time horizon is one of the most important factors in choosing an investment approach, alongside the purpose those reserves are meant to serve. The longer an organization can leave funds invested, the more options it has. The shorter the horizon, the more the emphasis shifts toward safety and access to cash.
Not all of your reserves are candidates for that move, and some may never be. Money needed in the near term should stay in cash management vehicles rather than move into a portfolio. The reserves that can stay invested longer are the ones this decision applies to. The next two sections cover each portion separately: first the reserves that should stay in cash management, then the reserves ready to move into a portfolio.
Yield disclosure: The 3% to 4.5% range above is illustrative only. It reflects general market conditions at the time of writing and is not a quote for any specific fund, account, or institution. Yields change with interest rates and vary by provider. Current Treasury rates are published by the U.S. Department of the Treasury; money market and CD yields vary by provider and should be confirmed directly with your bank, broker, or custodian before making decisions.
Pursuing Growth Over Longer Horizons
Over longer horizons, organizations may benefit from accepting additional market risk. Equities have historically provided higher long-term returns than cash, but also typically experience greater short-term movement and can sometimes produce negative returns over shorter periods. Organizations with a longer time horizon are better positioned to ride out that volatility, remaining invested when markets fall, to capture the higher expected return. For that reason, equity exposure is generally most appropriate for funds that are not expected to be spent in the near term. The objective is not to maximize return, but to earn a return appropriate for how long the organization can comfortably leave the funds invested.
Matching Investments to Time Horizon
The table below is a general illustration of how time horizon can inform the type of investment an organization considers. It is not a recommendation, and the appropriate approach depends on each organization’s objectives, spending needs, risk tolerance, and governance framework.
| Time Horizon | Primary Objective | Investment Types Often Considered |
|---|---|---|
| Under 1 year | Preserve principal, maintain access to cash | Treasury money market funds, Treasury bills, short-term CDs |
| 1 to 3 years | Stability with modest growth | Short-term, high-quality fixed income |
| 3 to 5 years | Balanced growth and stability | A blend of fixed income and a measured allocation to equities |
| 5 years or more | Growth and purchasing power | A diversified portfolio with a larger equity allocation |
Question 2: What are the various purposes our reserves are intended to fulfill?
Defining the purpose of your reserves means sorting them into distinct pools, each with its own job, rather than managing one large balance.
Most organizations already think about reserves this way: operating cash, short-term reserves, intermediate-term reserves, and long-term reserves, organized by how soon the money will be needed. That starting point is useful, but it can break down when two pools have a similar time horizon yet exist for very different reasons. Stability reserves and strategic reserves, for example, may both be long-term in the sense that neither is needed soon, but one exists to absorb a shock and the other to fund future opportunities. Treated as a single pool, the investment strategy often becomes a compromise: too conservative for growth, too aggressive for protection.
Aligning Nonprofit Reserves With Their Purpose
We often recommend factoring purpose into your reserve structure to further optimize your investment strategy. For example, a purpose-aligned reserve structure based on how and when a nonprofit or association’s reserves are expected to be used may look like the following:
- Operating checking cash: the funds that support daily operations, where immediate access matters more than investment return.
- Current-year cash reserves: liquid funds held for needs within the current fiscal year, typically kept in highly liquid, low-risk instruments such as Treasury money market funds or short-term Treasury securities.
- Planned reserves: dollars set aside for known future initiatives outside the annual budget, such as a facilities project, a technology upgrade, or a program launch, often invested with a short- to intermediate-term horizon.
- Stability reserves: funds that protect the organization against unexpected disruptions such as a revenue shock or a canceled event, where the timing of the need is uncertain.
- Strategic reserves: long-term dollars intended to expand programs, pursue partnerships, or strengthen the organization’s future, and generally the portion best suited to a diversified, long-term portfolio.
As each organization has different needs, the number of reserve “buckets” may vary organization-to-organization. For additional insight into stability versus strategic long-term reserves, read our recent article, Stability Reserves vs. Strategic Long-Term Reserves for Nonprofits and Associations.
Practical note: We have found that some nonprofits keep large balances in operating bank accounts. FDIC insurance is generally capped at $250,000 per depositor, per bank, per ownership category. All deposit accounts in that same ownership category at the same bank, including checking and savings, count toward that limit, so sizable balances can sit uninsured. To reduce risk, an alternative approach is to keep only near-term transaction cash in checking or savings while holding additional operating reserves in short-term, low-risk investments such as Treasury money market funds or short-term Treasury securities. Treasury securities are backed by the full faith and credit of the U.S. government, and Treasury money market funds are required to hold at least 99.5% of assets in cash, government securities, or fully collateralized government repurchase agreements, which is what makes them a high-quality, low-risk option. That said, the funds themselves are not bank deposits, and fund shares are not FDIC insured or otherwise government-guaranteed the way a Treasury security itself is.
Question 3: Is Our Nonprofit Able to Take on Risk and Withstand Market Fluctuations?
Risk capacity is the nonprofit or association’s financial ability to withstand market fluctuations without disrupting its mission or objectives, and it is separate from risk tolerance, which reflects how comfortable board members are with taking on risk. A committee may be willing to accept fluctuation, yet the organization may not be positioned to absorb it. Both willingness and capacity matter, but capacity is what protects the organization when markets fall.
To assess capacity, a finance committee can work through questions such as, if markets declined 20%:
- Would these funds still remain invested?
- Would programs need to be delayed?
- Would spending plans change?
- Could the organization comfortably wait for markets to recover?
Organizations with well-defined reserve policies, stable operating cash flows, and longer horizons are generally better positioned to pursue long-term growth. Organizations expecting to spend reserves in the near future often are not. Understanding your capacity for risk is just as important as understanding your board’s willingness to take on risk, as capacity determines whether a downturn is an inconvenience or a threat to your nonprofit or association’s work.
"Understanding your capacity for risk is just as important as understanding your board’s willingness to take on risk."
Question 4: Are the Added Nonprofit Board Governance Responsibilities Justified?
The added complexity is justified when reserves are large enough, and intended to stay invested long enough, that the potential improvement in outcomes outweighs the additional governance required. For organizations whose reserves are mostly short-term or relatively modest, it often is not. Long-term investing involves more than selecting investments, as it also introduces additional fiduciary responsibilities (the legal and ethical obligation to act solely in the organization’s best interest). As organizations transition from managing cash to overseeing an investment portfolio, boards and finance committees should expect to establish governance policies that support the nonprofit or association’s decision-making over time.
Governance responsibilities to expect
Additional governance responsibilities that occur alongside managing or overseeing an investment portfolio include:
- Setting a reserve policy: documented target balances for each designated reserve category, so the board has a clear basis for how much stays in cash versus moves into the portfolio.
- Developing an Investment Policy Statement (IPS): the written document that sets your objectives, risk parameters, and rules for how the portfolio is managed, including permitted investments, asset allocation, benchmarks, and assigned roles and responsibilities.
- Establishing a spending policy: rules for how and when the organization can draw from your reserves.
- Monitoring performance: regularly reviewing performance results against appropriate benchmarks that are reflected in your investment policy.
- Rebalancing periodically: returning the portfolio to its target mix as markets move.
- Reviewing managers and service providers: confirming that the organizations handling your money continue to meet your standards.
- Documenting decisions and oversight: keeping records that demonstrate the board fulfilling its fiduciary responsibilities, while also maintaining documentation that allows future board members to understand the basis for past decisions.
These responsibilities are a valuable part of prudent governance. For organizations with meaningful long-term reserves, they build discipline, accountability, and consistency. For organizations with primarily short-term cash needs, or relatively modest reserves, the added governance may outweigh the incremental benefit of pursuing higher expected returns. The goal is not simply to earn a higher return, but to determine whether the expected improvement in long-term outcomes justifies the additional governance required to pursue it.
What Fiduciary or Governance Responsibilities Can Investment Advisers Assist With
Investment advisers can help guide fiduciaries through the decisions related to nonprofit or association governance responsibilities, from helping develop the initial investment policy framework to the ongoing work of managing and reporting on the portfolio. Every investment advisory firm is different, so it is important to ask questions to understand exactly what services are available and included within the fee before entering into an engagement.
When it comes to managing the investment portfolio, organizations need to consider the decision-making authority they want to maintain versus transfer to their adviser, often described as discretionary versus non-discretionary investment management. To learn more about the differences between the two, and what hiring an adviser as an Outsourced Chief Investment Officer (OCIO) entails, read our article on discretionary versus non-discretionary investment management.
Raffa supports finance committees and boards on each of the responsibilities listed above, in addition to offering other nonprofit investing services such as board and finance committee education and donor engagement services.
What Changes When Reserves Move from Cash Management to an Investment Portfolio?
Moving reserves into a portfolio changes the objective, the time horizon, and the level of oversight involved. The comparison below outlines the differences finance committees can expect.
| Consideration | Cash Management | Investment Portfolio |
|---|---|---|
| Primary Objective | Preserve principal and maintain access to cash | Grow reserves and preserve purchasing power over time |
| Typical Time Horizon | Under 12 to 18 months | Several years or longer |
| Tolerance for Fluctuation | Low; short-term declines are difficult to absorb | Higher; the organization can stay invested through cycles |
| Governance Required | Modest; often handled within existing finance operations | Formal; IPS, asset allocation, monitoring, and documented oversight |
| Common Vehicles | Money market funds, Treasury bills, CDs | Diversified mix of equities and fixed income, often through funds |
In practice, many organizations maintain both at once: a cash management approach for near-term needs and a longer-term investment portfolio.
Final Thoughts
Nonprofit and association reserves serve different roles depending on their purpose and time horizon. Some funds are meant to remain liquid and easily accessible for near-term expenses, while others can be invested over the longer term in line with their purpose. When considering whether to move cash into a long-term investment portfolio, the question comes down to what your organization needs that money to do, and when it needs to be able to access it.
By working through time horizon, reserve purpose, capacity for risk, and governance readiness, finance committees and boards can approach these decisions in a disciplined, intentional way. The question is rarely whether reserves should be invested at all. More often, it is which reserve pools are ready to move into a portfolio, how long they can remain invested, and what oversight the decision requires.
If these four questions raise any concerns or leave you uncertain about how your reserves are positioned, it may be worth a conversation with an adviser who works with organizations like yours.
Frequently Asked Questions
What is the difference between cash management and a long-term investment portfolio?
Cash management typically positions operating cash and current-year reserves in conservative, highly liquid instruments, such as Treasury bills and Treasury-only money market funds, to preserve principal, maintain access to funds, and address FDIC exposure. A long-term investment portfolio is built using reserves that are not needed for several years, which generally allows them to remain invested in equities and fixed income through full market cycles. Both are actively managed, but a long-term portfolio typically requires a higher level of formal governance, including a detailed Investment Policy Statement and ongoing oversight.
What are the different types of nonprofit reserves?
Nonprofit reserves are often grouped into standard, time-based categories, such as operating or short-term reserves, intermediate-term reserves, and long-term reserves that are based on how soon the money will be needed. While that approach is a useful starting point, it can break down when two pools share a similar time horizon yet exist for very different reasons. For example, long-term reserves that are invested for future strategic initiatives can generally be invested in a less conservative manner than long-term reserves for organizational stability. This is why considering both purpose and time horizon is important. For example, a purpose-driven approach may sort reserves into buckets that include: operating checking cash, current-year cash reserves, planned reserves, stability reserves, and strategic reserves. Learn more about Raffa’s Purpose-Driven Approach to Reserve Structure.
Should a nonprofit invest reserves in stocks and bonds?
Long-term reserves that are not needed for several years are generally well suited to a diversified mix of stocks and bonds, since the organization can remain invested through full market cycles with the goal of pursuing higher expected returns. Short-term reserves or operating reserves are a different story: selling investments to cover near-term needs during a downturn risks locking in a loss, so short-term reserves are better kept in cash management vehicles that prioritize stability and access to funds.
What is risk capacity, and how is it different from risk tolerance?
Risk capacity is the organization’s financial ability to withstand market declines without disrupting programs or spending plans. Risk tolerance is how comfortable board members feel with fluctuation. An organization can have a high tolerance yet a low capacity, which is why both should be considered before investing long-term reserves.
Who is responsible for investing a nonprofit’s reserves?
The board holds ultimate fiduciary responsibility for a nonprofit’s reserves, though it typically delegates day-to-day oversight to a finance committee and may further delegate implementation to an outside adviser. How much of that authority is delegated, often described as discretionary versus non-discretionary investment management, is itself a governance decision that the board and finance committee need to carefully make and include in the investment policy statement.
Juliana Salamone, CFP®
Senior Portfolio Manager
Juliana Salamone, CFP®, is a Senior Portfolio Manager at Raffa, where she works closely with nonprofit clients and individuals to develop thoughtful, prudent investment strategies aligned with their goals, preferences, and financial condition. She brings deep experience serving clients, guiding them through comprehensive financial planning, portfolio construction, and ongoing investment oversight. Juliana is a CERTIFIED FINANCIAL PLANNER™ professional and an investment adviser representative of Raffa.
Disclosures:
This article is for informational and educational purposes only. It does not constitute investment advice or a recommendation to buy or sell any security or to adopt any particular investment strategy. The views expressed are general in nature and may not be suitable for all organizations or investors. Investment decisions should be made based on an organization’s specific financial situation, objectives, time horizon, and risk tolerance, in consultation with qualified professional advisers.
All investments involve risk, including the possible loss of principal. Past performance is not indicative of future results. Investments in equity securities are subject to market fluctuation and may experience significant changes in value. Fixed income investments are subject to interest rate, credit, and liquidity risks. There can be no assurance that any investment strategy will achieve its objectives.
Any references to yields or returns, including ranges such as those associated with cash management vehicles or diversified portfolios, are for illustrative purposes only and are based on historical market data and general market observations. Such figures do not reflect the performance of any specific account or client portfolio and do not account for fees, expenses, or other factors that would reduce returns. Actual outcomes may vary significantly depending on market conditions and other factors.
Investment categories referenced, such as cash equivalents, fixed income, and equities, differ materially in terms of risk, fluctuation, liquidity, and time horizon, and are not directly comparable. Indexes are unmanaged and cannot be invested in directly. References to specific indexes or vehicles are illustrative examples of commonly used instruments and are not recommendations.
Any discussion of governance practices, including the development of an Investment Policy Statement, asset allocation, or portfolio oversight, is intended for general informational purposes only. Organizations should consult with qualified advisers when establishing or modifying investment programs.
Any forward-looking statements are based on current expectations and are subject to uncertainties. Portions of this article were drafted with the assistance of AI tools and reviewed by Raffa Investment Advisers staff for accuracy and compliance.
Raffa Wealth Management, LLC, doing business as Raffa Investment Advisers, is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training. Additional information about the firm, including its services and fees, is available in Form ADV Part 2A, which can be obtained upon request or at https://adviserinfo.sec.gov.