Constructing Your Philanthropic Portfolio

With the approach of peak charitable giving season, you have the opportunity to plan your donations systematically. It’s common to respond to incoming requests and specific events, including annual appeals and natural disasters. But this reactive approach, while understandable and common, may not provide the long-term impact that could result from a more deliberate and strategic process.

Interestingly, investors who seek to maximize the return on their financial investments through a disciplined process may approach charitable giving without any framework or consistent vetting method. Yet the “returns” they seek in terms of positive community impact may be no less important or meaningful to them.

Below, we provide questions you can consider to inform your philanthropic efforts, and then offer guidance on building your nonprofit portfolio.

Questions to Ask

Why Are You Giving?

Philanthropy may arise from a range of motivations, including faith, a formative experience, tax benefits and desire to contribute to society. These motivations may coexist in different measure at various life stages, and often reflect the donor’s core personal values. Understanding your long-term vision of success will help prioritize and structure your giving in seeking to realize your charitable goals.

Who Will Participate?

While philanthropy may begin as a solo endeavor, it may eventually engage spouses, children and grandchildren. It may also involve trusted nonfamily member advisors or subject matter experts to help guide and advance your philanthropic intent. Considering your successors in the event of death or incapacity is also critical to mitigate disruption to your charitable giving. Regardless of whom you choose to involve, sharing your philanthropic purpose will be instrumental in guiding collective decisions and expectations in the future.

How Will You Make Decisions?

Philanthropy often seems daunting, and it can be hard to know where to begin. We all have a unique giving philosophy, and understanding yours can guide your priorities and decision-making.

Core values may inform your approach. For instance, those who especially value integrity in personal and professional relationships may want to see this quality in charities, via transparency in the use of funds, and follow-through on particular projects. Some who value diversity may seek to support nonprofit leaders who have historically lacked access to capital and connections. Others may seek evidence and data in their choices. Understanding what drives your decisions will help clarify the primary themes in your philanthropic investing.

Procedure matters as well, especially when more family members are involved in your process. Establishing voting rules, due diligence standards, individual versus group grantmaking opportunities and more can enable collective action and minimize conflict.

What Do You Want to Accomplish?

After you’ve established the why, who and how of your philanthropic decision-making, you have the basis to set short- and long-term objectives for deploying your capital. With so many worthy causes out there, you need to decide what to focus on: What problems do you wish to solve? What organizations do you feel connected to? What issues, topics or areas spark your passion?

As with any business plan, understanding the current landscape of your focus area is important to build on the experience of others and avoid duplication of efforts and resources. Once you find areas of unmet opportunity, its useful to develop a series of milestones for your philanthropy. These indicators may consist of precise quantitative goals or more general targets, and can be adjusted over time. The point is to foster discipline and accountability in charting your journey.

Where Will You Invest?

As financial portfolios may hold investments in companies based both in the U.S. and in foreign markets, you have the option to give to charities based locally, nationally or globally. Understanding your desired geographic footprint can help you prioritize your energy and capital.

When Will You Invest?

Since philanthropy involves spending, determining your annual giving budget and the time horizon of your charitable vehicle helps to solidify the framework of your philanthropy. Your advisors can help ascertain your desired annual charitable giving budget, in light of your other spending priorities, both in current and future years.

As for giving primarily during life or upon death, this decision also affects the amount of your annual charitable spending. Providing for philanthropic funds after death raises the planning question of duration: The selected time horizon of a foundation, for instance, can span a limited number of years or extend into perpetuity. As with a personal portfolio, your philanthropic time horizon informs investment strategy. While your preference may change over time, understanding your desired timing can help optimize portfolio growth in relation to the timing of its deployment.

Constructing Your Nonprofit Portfolio

Sector Allocation

When investing for financial return, asset allocation is crucial to portfolio construction. Similarly, philanthropic objectives can determine the makeup of your charitable giving. You may have philanthropic capital in your personal accounts, a donor advised fund, a private foundation or a combination of all three. Whether these are viewed separately or together, you can determine your desired sector allocation proactively, while allowing for flexible “emergency” giving should the need arise. Naturally, your allocation can evolve over time to reflect your priorities.

Targeting Your Desired Philanthropic Allocation

Sample Categories

For illustrative and discussion purposes only. These are sample categories; you may define your own areas of interest in other ways.

Risk Profile

Depending on your giving philosophy, the types of institutions you support may vary. Some donors may prefer larger nonprofits with a long track record and deep expertise. For such grants, “returns” are predictable and consistent, for example through the number of meals served, or patients treated. They may have significant resources, but also have a significant budget to maintain operations.

In contrast, start-up organizations may appeal to those who value innovation, albeit with greater risk of failure. Your risk preference may depend on the cause. For local impact, you may wish to support a new grass-roots organization, but for global emergency relief, you may prefer an organization that has responded quickly to disasters over time. Knowing your risk profile can help you align your capital efficiently within your sectors of focus.

Active vs. Passive

Investors often consider the “active-versus-passive” decision by assessing what areas of the markets may be more suited to each approach. In philanthropy, donors can similarly choose charities on an active or passive basis—both of which can serve an important purpose. Passive gifts leave the details to the organization you have funded. Active philanthropic involvement, in contrast, may entail ongoing dialogue with nonprofit leadership to assess its needs and progress. An active approach may involve serving as an advocate for the organization, as well as publicly announcing matching or challenge grants to attract further support; and an active donor may serve on the organization’s board, assuming a fiduciary duty for its health and substantiality. You may wish to take a combined approach, depending on the cause. Clarifying your preference helps to prioritize not just your capital, but your valuable time and effort.

Due Diligence

Once you’ve determined your sector allocation, risk profile and investing style, the next step in constructing your philanthropic portfolio entails due diligence of potential nonprofit grantees. As in financial investing, you can evaluate organizations across an array of factors, including track record, leadership, financial health and more (see “Nonprofit Factors to Explore,” below.

Monitoring

Effective philanthropy requires ongoing monitoring of your nonprofit portfolio, which may include reading organizations’ annual reports for budgets, accomplishments and plans; following them on social media; scanning the “news” sections on their websites (and of similar organizations) and signing up for their e-newsletters; and attending organization-sponsored events. If you make a major gift, consider meeting with the nonprofit to get updates directly.¹

A Systematic Approach

Traditional investing and philanthropy can share important similarities—particularly in relation to allocation, research and follow-through. In both cases, organized effort can produce better results, one in the form of monetary returns and the other in terms of impact on the broader world. Although the evolution from ad hoc giving to a philanthropic portfolio involves some thought and effort, no one should be intimidated. With help from your advisors, it can be meaningful and ultimately rewarding process.