Proper asset allocation and diversification remain the keys to solid risk-adjusted returns. There is, however, one significant difference when managing your foundation's assets rather than another portfolio: Because your foundation could exist for multiple generations, your investment strategy will most likely need a significantly longer time horizon than a personal portfolio.

Your foundation's investment strategy should take into account the long-term effects of inflation and the historical performance of the financial markets. Given this extended time horizon, the focus should include long-term stability rather than focus solely on short-term performance.

Creating an Investment Policy Statement

Gauging your board's goals and risk tolerance is an essential step in creating an investment strategy, and will help you determine suitable investments for your foundation. Your board may wish to prioritize its investment goals. For example, is it most important to preserve the initial foundation contribution or to invest for potential long-term growth? This information, and an understanding of the board's level of comfort with performance volatility, will help inform your foundation's investment strategy. A brief investment policy statement to document this strategy can provide guidance and direction to your investment managers.

Selecting an Appropriate Asset Allocation

Asset allocation — the percentage mix of stocks, bonds and cash — is the backbone of the foundation's portfolio and an important factor in determining performance. Generally, if your foundation is willing to accept short-term volatility in order to maintain greater appreciation potential, your foundation will consider holding more equity investments than would a foundation interested primarily in preservation of capital.

No matter how you weight your portfolio among asset classes, you will also want to diversify within them in order to avoid having too much of your foundation's assets invested in one security.

Diversification includes:

• Stocks — Balancing for sector, size and investment style
• Bonds — Staggering maturity dates
• Cash — Choosing instruments that allow you to earn the best possible returns given your foundation's short and long-term liquidity

Avoiding Common Pitfalls

Keep in mind that investing assets with different managers or in various mutual funds may not be sufficient for creating a truly diversified portfolio. Portfolio managers can pursue similar strategies, or hold similar investments, even if they have different objectives.

In general, you should always examine your complete portfolio and understand how each component works with the others. Along with your investment manager, you must review your holdings frequently and adjust them as necessary.

Carefully planning your foundation's investment strategy and gaining your board's approval will not only help ensure your foundation's success — it is also strongly recommended as a part of fulfilling the board's fiduciary responsibility.

Your board or investment committee may benefit from professional guidance in examining these issues and crafting and investment policy. Fidelity's professional investment managers are available to help, and we offer a variety of flexible options for managing your foundation's portfolio.

Speak with a representative: 866-273-2130