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Your Church, Mar/Apr 2001
Do You Know Where Your Church's Money Is?
How to create and manage a wise investment strategy
by Robert Lovret
Do you know where your church's money is? Do you know what it's being used for?
In the '90s, the Baptist Foundation of Arizona (BFA) sold over $530 million in investments to more than 130 churches and 13,000 individuals. The BFA invested primarily in real estate, something churches are often hesitant to invest in unless it is property used for ministry.
The BFA has since gone bankrupt, which means 130 churches stand to lose a lot of money.
However, had the churches that invested with the BFA had a written investment policy, it's possible they would have avoided throwing their money away.
If your church has any outside investments or is even considering having any, then you need to create an investment policy. This important stewardship tool is basically a clear, concise statement of investment objectives and parameters, and it's not just something for the megachurch with a multimillion-dollar endowment. For example, a resort-area church that saves offerings from the vacation season to pay expenses during the offseason and a small church saving diligently for a new building both need an investment policy. In fact, if your church has money set aside for anything other than immediate operating costs it should have specific guidelines concerning these funds.
A written investment policy provides several benefits:
1. It establishes a structured, disciplined process for investing church funds, which makes it less likely the church will find itself losing money in legal but inappropriately risky investments. Because the policy prescreens acceptable investments, the church is less susceptible to fraud.
2. A written investment policy provides continuity as leadership changes; and creates a climate of accountability for those making investment decisions.
3. If your church has a financial adviser, an investment policy gives that person guidelines within which to operate.
4. To church members, a policy indicates that their tithes and offerings are being handled responsibly. An investment policy also provides church leadership an easy way to say no when members approach them touting sketchy investment opportunities.
Where to Begin
The first thing to do is to assemble a team to draft your policy. The team does not have to be large, but it should include those who will be involved in implementing and monitoring the policy, as well as individuals with financial expertise. Depending on the size of your church, the team could include a pastor, church administrator, treasurer, trustees, or church members who are CPAs or financial planners.
After you have your team, it's time to prepare a policy draft. There are three elements to include in an effective investment policy: the investment objectives of the church; a list of allowable investments; and a system of accountability to ensure compliance with the policy. An investment policy does not have to be a lengthy manual; it can be a simple one-page document.
Your objectives are the criteria on which investment decisions will be made. In defining your objectives you will need to consider safety, liquidity, and yield and then prioritize them. Typically, churches rank safety as their top priority.
• Safety refers to the level of investment risk your church is willing to accept. Risk is the likelihood that an investment will decline in value or be lost altogether. Credit risk involves the threat of loss due to the failure of the entity in which the church invests. A U.S. government bond has a lower credit risk than an investment in an Internet start-up company.
Market risk is the threat of a decline in value due to changes in market conditions. Investments in common stocks can suffer long-term or permanent declines in value.
Generally, as the rate of return on an investment increases so does the risk of the investment. Investments with a lower risk typically will have a lower rate of return. The amount of risk your church is willing to accept should be specifically defined.
• Liquidity is the speed and ease with which an investment can be converted to cash. A checking account is liquid, whereas a stock investment is not liquid unless there is a market for it. Assessing your liquidity needs is an important part of developing an investment policy. A church that will not construct its new sanctuary for another five years can invest its building fund differently than the church starting construction within the year.
• Yield is the rate of return earned on an investment. Your yield objective serves as a yardstick to measure the success of the church's investment. Yields can be compared against various measures, including rates on certificates of deposit (CDs), rates on money market mutual funds, or the S&P 500 stock index. The yield a church can expect on its investments is a function of the level of risk it can tolerate and its liquidity needs.
Choosing Your Investment Categories
Once your investment objectives have been established and prioritized, you should then identify general categories of investments that meet your needs.
Four categories of investments that a church would commonly consider are: CDs; government notes and bonds, which have the lowest relative risk; investment-grade corporate bonds, which are higher on the risk scale; and common stocks (equity securities), which are highest in relative risk.
Limits should be placed on the amount of money to be placed in each type of investment. This can be illustrated by a pyramid diagram. Risk is limited by concentrating investments in safer categories at the base of the pyramid. Progressively smaller amounts can be invested in riskier investments toward the top of the pyramid, such as corporate bonds or common stocks. The church's tolerable risk level will determine how flat or steep the pyramid will be. Your church should strive for some diversity, limiting the amount that can be invested in any one company or type of security.
Traditionally, churches have favored investments with lower risk. However, some churches are beginning to invest more in stocks and mutual funds, which have a relatively high risk. If your church chooses to include many stocks and mutual funds among its investments, it should do so only if someone in your congregation has adequate knowledge and experience to devote to selecting and managing such a portfolio. Your church must also be able to tolerate temporary or permanent loss.
The Buck Stops Here
Third, your investment policy should include a system of accountability and internal control. By position, you'll need to identify who will be responsible for making investment decisions. This may be one person, a special committee, or an existing committee. One church in Oregon has an investment committee consisting of two active elders and three members-at-large, serving rotating three-year terms.
The person responsible for actually executing the investment transactions should be designated. And, someone not involved in the investment process should receive monthly bank or brokerage statements. Copies should be provided to those making investment decisions.
Finally, if the church is using the services of a brokerage firm or an outside investment adviser, the broker or adviser should be asked to read the investment policy and sign a statement acknowledging they understand its provisions.
By taking the time to develop a written investment policy, your church will be taking a vital step toward better stewardship. Your members will thank you in the long run.
Robert Lovret (rlovret@hsno.com) is a CDA in Garden Grove, California.
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