In the ever-changing investment markets, evaluating and monitoring your organization’s investment portfolio has become increasingly more challenging and important.

Formal investment policies could be required when working with a third-party investment manager. But all organizations can benefit from establishing a written investment policy. Having a written policy forces management to identify the goals of the organization and provide a benchmark to monitor and evaluate past performance and new investment opportunities.

One of the first steps to developing an investment policy is to identify any legal or contractual restrictions that could exist that would limit the types or amounts of investments an organization may consider. Restrictions will vary depending on the type of organization, but some of the more common restrictions could be driven by regulatory agencies, lending agreements that require minimum amounts of working capital or donor restrictions for non-profit organizations.

After considering external restrictions, management should document the investment objectives of the organization by identifying financial needs or future goals while still taking into account the amount of risk management is willing and able to assume to achieve those goals. Risk tolerance is usually evaluated by the amount of volatility or fluctuation in the value of investments, but some consideration should also be given to the amount of time an organization is willing and able to hold an investment. If earning goals exceed the amount of risk the organization is willing or able to bear, the portfolio is already set up for failure, so the objectives and tolerance must be aligned.

Once restrictions, objectives and risk tolerance are identified, the organization can define a list of investments or investment types specifically prohibited or allowed, limitations to certain types or amounts invested in individual assets and benchmarks for monitoring performance and identifying where changes could be needed.

Now that an investment policy has been established, it must be communicated with those responsible for investing the organization’s funds, and regular meetings should be scheduled to monitor the portfolio and whether or not it’s meeting the investment objectives. Effective management and oversight constitutes a cornerstone for fiduciary responsibility and sound internal controls. Without monitoring, ineffective policies and procedures won’t be identified.

Organizations should work with their trusted advisors to develop and monitor an investment policy to ensure the policy complies with legal or contractual restrictions, the accounting for investments is appropriate and any tax implications of a certain type of investment are known ahead of time.