Lynn O'Shaughnessy

Just about every time I visit the grocery store, I am reminded this is the season of giving. Standing next to a big red kettle swinging from an old chain, a bell ringer from the Salvation Army wishes everyone a merry Christmas, even those who ignore his ringing entreaties to help.

Charities excel in cajoling us into reaching into our wallets to help the less fortunate, whether it's families trapped in the Darfur chaos or a brave child fighting a terminal diagnosis in an oncology ward. But charities also have an obligation to invest their hard-earned donations wisely. And I've seen no evidence that many nonprofits know how to invest even as well as my 14-year-old son.

As an occasional contributor to the Chronicle of Philanthropy, I've run across stunning examples of investment mismanagement. One board, for instance, directed $500,000 into a noninterest-bearing account because they thought a charity's money couldn't generate interest.

An outside expert from BoardSource, which is devoted to helping nonprofits function better, convinced the board that generating a profit from their donations was not only legal, but an excellent goal.

When she paid a visit a few months later, however, the board had executed a hazardous U-turn and was talking about throwing a lot of cash at small speculative stocks.

Meanwhile, a well-known charity in San Diego, which once had $150 million in assets, stupidly gambled it all on tech stocks and lost big-time. I'm sure its benefactors would have been livid if they knew how quickly their donations had shrunk to roughly $50 million.

It's not hard to appreciate why so many charities fail to invest wisely. Often, nonprofits are created by passionate people who want to rescue rain forests, fight illiteracy or save blighted neighborhoods, but they've never even heard of modern portfolio theory. Many charitable boards wouldn't know where to begin to fashion investment portfolios that appropriately balance the financial risks they are willing to assume with the financial rewards they hope to gain.

For many board members, a charity's biggest risk is failing to raise enough money to meet their fundraising goals. Potentially losing this cash through boneheaded financial moves isn't something they dwell upon.

Seeking outside help may seem like the obvious answer for charities, but there are hidden hazards in following that course. Sandra Champion, who is principal of Champion Partners, a consulting firm in Savannah, Ga., that advises nonprofits on financial practices, says cultures clash when charitable-minded people meet in a conference room with financial experts.


Lynn O'Shaughnessy

Lynn O'Shaughnessy is the author of Retirement Bible.

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