The problem with excessive risk in non-profit endowments is because many of those organizations depend on consistent annual returns. Now, because the endowments have decreased and are yielding smaller returns, organizations are left with operating gaps they cannot fill. If an organization is dependent on endowment, it needs to take measures to ensure that endowment will be there in the good times and the bad.

Yes, the organization would forego profits in the good years with conservative investing, but they would also avoid devastating income gaps like we are seeing this year.

What's even more ironic is that with the passage of UPMIFA by 39 states last year, nonprofits are required to use a total return model in their investment portolio's guidelines. Ignoring total return puts nonprofits at risk of falling outside what the IRS or state attorneys general would consider reasonable or prudent -- it would be illegal for nonprofits to do as the author suggest. Guess somebody didn't do their research...

Totally agree with you, Ian. To suggest that the sole purpose of an arts endowment is capital preservation is patronizing and short-sighted.

Unfortunately, I believe the IRS applies this principle as a matter of policy at times, and non-profits have actually gotten into trouble for "risky" investment strategies that would be acceptable at a for-profit (or even a mutual fund) under the business judgment rule.

I don't understand this double standard about risk as applied to arts endowments just because they're nonprofit. Who says the goal is capital preservation? Why wouldn't you just want to maximize returns over the long term just like anyone else? Is Forbes saying that the banks should have avoided equity markets too?

Now, I could see a plausible argument for nonprofits accepting a lower return in exchange for investing in socially responsible businesses (or at least avoiding socially irresponsible situations). But that's not the argument he's making.