Key Takeaways:
- A market decline is not, by itself, a reason to change the Investment Policy Statement. The committee’s first job is to confirm the portfolio is still within the policy’s guidelines.
- According to Hartford Funds, 76 percent of the S&P 500’s 50 best days from 1996 to 2025 came during a bear market or the first two months of the recovery that followed.
- Reserves needed within a year should be held conservatively so a decline has less effect on them; reserves not needed for five or more years may be invested for the longer term.
- After a decline, a finance committee can confirm near-term liquidity, check the portfolio against its allocation ranges, and review any scheduled draws.
- A policy change is warranted when the organization’s circumstances change, such as a new liquidity need, not simply because the market turned.
Educational / General Disclaimer: This article is for informational and educational purposes only. It does not constitute investment advice. 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. Market history discussed in this article is not a prediction of future results.
What Should a Finance Committee Do During Market Volatility?
During a period of significant market volatility, a finance committee’s first job is to confirm that the portfolio is still within the guidelines of its Investment Policy Statement. Most of the decisions a sharp decline could demand ideally were already made when the policy was written: how much risk to carry, how reserves are divided across investments, how much stays accessible, and how far the portfolio can drift before it is rebalanced.
This article covers why moving to cash after a decline has historically been costly, how reserve structure determines what a decline affects, what the IPS already addresses, and when a policy change is warranted.
Why Moving Reserves to Cash After a Market Decline Is Costly
Moving long-term reserves to cash after a market decline has historically been costly because the market’s strongest days tend to arrive close to its weakest ones, and an investor who has sold to cash is not invested for the recovery.
According to Hartford Funds, a hypothetical $10,000 invested in the S&P 500 from 1996 through 2025 would have grown to approximately $192,167 if left alone (figures reflect S&P 500 total returns with dividends reinvested and do not reflect fees, expenses, or taxes.) Missing only the ten best days over those 30 years would have reduced that to $85,490 (56 percent less), and missing the 20 best days to $49,551 (74 percent less). The same analysis found that 48 percent of the market’s 50 best days occurred during a bear market and 28 percent occurred during the two months of the bull market that followed, which is when an investor who sold after a decline may have been in cash.
Raffa’s Chief Investment Officer, Mark Murphy, CFA, examined the same pattern in a past market update, including average returns in the one, three, and five years that followed past declines of 10, 20, and 30 percent.
These figures describe the S&P 500, an unmanaged index that cannot be invested in directly. Most nonprofit reserves are diversified across stocks and bonds rather than held in a single equity index, and past performance is not indicative of future results. The broader point holds: selling after a decline requires being right twice, when to get out and when to get back in, and the second decision is where the historical record shows most of the damage is done.
Which Nonprofit Reserves Does a Market Decline Affect?
A market decline mainly affects the reserves that will not be needed for years, because those are invested for the longer term, while reserves needed soon are held conservatively. A well-built reserve structure has already segmented the reserve assets this way. When reserves are segmented by purpose and by time horizon, each pool’s investments and risk match the reason it exists and when the funds are expected to be used.
| Reserve pool | When the money may be needed | How it is typically held | What a market decline means for it |
|---|---|---|---|
| Operating cash andshort-term reserves | Within the next year | Checking, Treasury money market funds, and short-term Treasuries | Little effect. This pool is held so that a decline has minimal impact on it. |
| Intermediate-term reserves, including planned reserves | One to five years | Short-duration fixed income, laddered CDs, or Treasuries | Limited effect. Funds needed soonest are held where a decline does not reach them. |
| Emergency reserves | Timing uncertain; held for disruptions such as a revenue shock or lost funding | Conservative, balanced allocation, with a portion kept accessible | A modest paper loss is possible. Because a disruption and a decline can arrive together, the accessible portion matters most; the balance has time to recover. |
| Strategic reserves | Five years or more | Diversified, growth-oriented portfolio of stocks and bonds | This pool has time to recover. Selling converts a temporary loss into a permanent one. |
Restricted reserves are invested according to the terms of the restriction. The table describes general tendencies, not predictions, and results vary by organization.
When reserves are structured this way, an organization whose next twelve months of needs are held in conservative investments far less likely to have to sell long-term investments at a loss to make payroll, fund a program, or cover a grant delay. Cash management instruments such as Treasury money market funds and short-term Treasuries are designed to hold their value and stay accessible, although no investment is without risk. A decline can also reveal a structural problem: money needed next year sitting in the long-term pool, or an operating reserve thinner than the organization’s cash cycle requires. Situations like this are a reason to revisit the reserve policy and evaluate how well it aligns with the organization’s needs, so that the next decline does not put the organization in the same position. Our companion articles on nonprofit scenario planning and association financial strategy for a soft year cover how to stress-test a budget and what the results mean for reserve policy.
How the IPS Guides a Nonprofit's Response to Market Volatility
The Investment Policy Statement (IPS) guides a nonprofit’s response to market volatility because it already covers how much risk the organization carries, how its reserves are segmented across types of investments, how much stays accessible, and how far the portfolio can drift before it is rebalanced. After a decline, the committee’s questions become factual rather than speculative: Is each reserve pool still invested the way the policy permits? Has the decline pushed any allocation outside its permitted range? Is the money needed in the next twelve months still held where the policy says it should be? The committee should be able to answer each of those from its typical investment reporting.
The allocation itself is generally built with declines in mind. Asset allocation is the primary driver of long-term portfolio results. A balanced reserve portfolio combines global equities with high-quality fixed income. Equities provide participation in long-term economic growth, while bonds can moderate volatility and provide income during periods of market stress. Broad, cost-efficient diversification across asset classes and markets is what allows the portfolio to absorb a decline in one area without the organization having to react to it. This is why a portfolio invested in alignment with your board’s risk tolerance and organization’s risk capacity is crucial.
Why Rebalancing Is a Policy Decision, Not a Market Call
A market decline can change the allocation of a portfolio without anyone making a decision. When stocks fall and bonds hold their value, the share of the portfolio in stocks drops below its target. The IPS sets how far that share may drift before the portfolio is rebalanced back to target, which after a decline means selling some of what’s above target and buying some of what fell, at lower prices. This policy component makes rebalancing a policy decision rather than an emotional or market-driven decision. The committee’s investment reporting should show whether the portfolio is within its permitted range.
The allocation itself is generally built with declines in mind. Asset allocation is the primary driver of long-term portfolio results. A balanced reserve portfolio combines global equities with high-quality fixed income. Equities provide participation in long-term economic growth, while bonds can moderate volatility and provide income during periods of market stress. Broad, cost-efficient diversification across asset classes and markets is what allows the portfolio to absorb a decline in one area without the organization having to react to it. This is why a portfolio invested in alignment with your board’s risk tolerance and organization’s risk capacity is crucial.
How a Decline Affects Endowment and Reserve Draws
If the organization takes a regular draw from a long-term reserve or endowment, a market decline can change the amount available to the budget, and the committee should confirm how the draw is calculated before the next budget is set. Many spending policies apply a percentage, often between 4 and 5 percent, to an average of portfolio value over the past 12 to 20 quarters. Averaging means a single bad year moves the draw only modestly, because it is one of several years in the calculation. A policy that applies the percentage to current value passes the full decline through to the draw, so a 20 percent decline in the portfolio produces roughly a 20 percent smaller draw the following year.
The timing of the draw matters as well. If the coming year’s draw is already held in the short-term pool, the organization does not have to sell long-term investments at depressed prices to fund it. If the draw is taken from the long-term pool as needed, the committee should look at when and how it will be raised, since the spending policy governs how much can be drawn but not the timing of the sale.
When Is a Reserve or Investment Policy Change Warranted?
A change to the reserve policy or the Investment Policy Statement could be warranted when the organization’s circumstances no longer match the assumptions the policies were written under. Those changes include a significant shift in budget size, the loss or addition of a major revenue source, a change in the mix of restricted and unrestricted funds, a new capital need with a known date, or a scenario exercise that reveals a near-term liquidity requirement the current allocation does not cover. Any of those is a reason to schedule an investment policy review with your advisor.
A market decline, a recession forecast, or a committee member’s discomfort with a quarterly loss are not changes to the organization. They may be reasons to confirm, and document, that the policy still fits, but they are not reasons to abandon the allocation. Sharp declines, and the headlines that accompany them, can provoke strong reactions and tempt a committee to make abrupt changes, but staying disciplined and focusing on the organization’s long-term objectives has historically rewarded investors who did so, although past performance does not indicate future results and no outcome is assured.
How Raffa Can Help
A market decline may raise questions about whether an organization’s reserve structure and Investment Policy Statement still fit its circumstances. Raffa Investment Advisers works with nonprofit and association finance committees on reviewing the portfolio against the policy, confirming near-term liquidity, and considering what reserve policy and IPS adjustments may be beneficial.
Schedule a Meeting with Our Team of Advisors Experienced in Partnering with Nonprofits and Associations
Frequently Asked Questions: Reserves in a Market Decline
Should our nonprofit move its reserves to cash when the market drops?
A nonprofit generally should not move its long-term reserves to cash when the market drops. Reserves needed in the next twelve months should already be held in cash or short-term investments, and long-term reserves are built to ride through declines. Selling them after a drop converts a temporary loss into a permanent one, and money held in cash does not participate in the recovery that has historically followed.
How long does it usually take the stock market to recover from a bear market?
According to Charles Schwab’s Article, Stay the Course When Markets Turn Turbulent, the average bear market since 1966 has lasted about 15 months with a decline of roughly 38 percent, while the average bull market has lasted nearly six years with a gain of approximately 210%. Individual declines vary widely, and past patterns do not predict any particular recovery, which is why long-term reserves invested in a diversified portfolio of stocks and bonds benefit from longer time horizons.
Should we rebalance our portfolio after a market decline?
A portfolio should be rebalanced after a market decline if the decline has pushed it outside the allocation ranges set in the Investment Policy Statement. Whether and when to rebalance is a policy decision the committee should be able to confirm from its reporting, and an advisor should be able to walk through the mechanics and cost.
Does a market decline change how much we can draw from our endowment or long-term reserve?
A market decline changes the draw only if the spending policy is calculated from current portfolio value. Policies that calculate the draw from a multi-year average smooth the effect of a single bad year. The committee should confirm which method applies before adjusting the budget.
What is the finance committee's fiduciary responsibility during a market downturn?
The finance committee’s fiduciary responsibility during a market downturn is to follow a prudent, documented process rather than to predict the market. That means confirming the portfolio is within policy, confirming near-term liquidity, reviewing any scheduled draws, and recording the committee’s review and decision.
About the author
Matt O’Lone, CIMA®
Portfolio Manager
Matt O’Lone is a Portfolio Manager at Raffa Investment Advisers and serves as Relationship Manager and Lead Adviser for nonprofit organizations, associations, and other institutional clients. Through this role, he works closely with boards, finance committees, and staff to help align investment strategy with organizational objectives, risk tolerance, and governance requirements. As an active member in the nonprofit and association community, Matt has participated as a panelist and event host for organizations including the Nonprofit Resource Hub, NoVa Association of Executives, and the Greater Washington Society of CPAs.
Disclosures
Portions of this article were drafted with the assistance of AI tools and reviewed by Raffa Investment Advisers staff for accuracy and compliance. Raffa Investment Advisers is a registered investment adviser with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. All investments involve risk, including the possible loss of principal. Past performance is not indicative of future results. Indexes are unmanaged and cannot be invested in directly. References to the S&P 500 are illustrative and are not recommendations. Market history cited in this article is drawn from third-party sources, is presented for educational purposes, and is not a prediction of future market behavior. Any forward-looking statements are based on current expectations and are subject to uncertainties. This article is for informational purposes only and should not be construed as personalized investment advice.