How charities can navigate risk and reward in investment

How you balance risk and reward is a question that all investors, including cash investors, should ask themselves on a regular basis. Today your charity may not mind accepting some risk if it means you could get a better return in the future. However, that might change, depending on your short- or long-term circumstances. There is no one answer to this.

Balancing risk and stability

Instead, your organisation needs to consider how much you are prepared to – or can afford to – lose (ie, the risk you can take on) to gain potentially higher rewards. Generally, the higher the risk of losing your money, the greater the potential reward you may receive. 

One every-day example of this is that many people buy lottery tickets in the hope of becoming multi-millionaires. But, with so many possible combinations of the numbers to choose from, you only have a one in over 45 million chance of winning. So most players assume that they have already lost the cost of the ticket for no reward, before the draw happens.

At the same time, as an investor, you also need to consider if the money you choose not to invest today will be worth as much – or enable you to buy as much – in the future, due to inflation. It means every financial decision carries a risk, even doing nothing. 

So, you need to strike a balance – spending what you need to, and then deciding if it is appropriate for your charity to save some of what is left and consider investing the rest to help your funds grow.

How could you think about risk and reward?

One very common way organisations use to think about their short, medium and long-term financial needs– as I have written about before –  is the cupboard, fridge, freezer method.

• Short term: This is the money you may need to spend in the next six months. You know that you need this, perhaps, for a bill or grant payment, so you do not want to risk it not being there. The cost of living is unlikely to have too much impact on the value of goods it will buy in this shorter time, so a low-interest-paying or even non-interest-paying account with a reputable bank could be a suitable home.

• Medium term:  This is the money that you may need in the foreseeable future or to meet an unexpected issue or opportunity.  It is a risk to put money in an account where you cannot get to it quickly, say a notice account. But an instant access savings account might offer better interest rates than a current account, potentially, helping you to keep up with some of the costs of living. For money that you can risk not having access to for a period, you should be able to get a higher interest rate if you choose a notice or fixed term account. Here you risk not being able to access the money quickly, but you should be paid more interest to compensate.

When considering a cash or savings account, the strength and security of the account provider is also a factor. You need to be confident that the institution is stable and will be able to return your funds when you need them.

• Long term: Here, your organisation may be able to think broader, as these are funds that you can afford to set aside for an extended period – or, in the worst case, lose – in anticipation of a greater reward. 

Long-term assest values could fluctuate

There are many types of investment with different risks and rewards, as Figure 1 shows, highlighting the value of stock markets between 17 February 2020 and 17 February 2025.

The blue line shows the return in % terms from the FTSE All World Index, which details the performance of global companies, excluding the UK. The red line is the FTSE All Share Index, which covers all quoted UK companies. Both of which are expressed as a percentage of initial investment,  shown in pound sterling.

If you invested on 17 February 2020 in either market, you would have seen good returns by 17 February 2025. However, both markets dropped heavily, due to the pandemic before recovering, and unless you decided to sell the investment in the spring 2020, you would have had a paper loss of up to 35%. A paper loss means you still own the investment, but its value is much less than what you originally paid for it.

So, it is always crucial to remember that potential rewards are in no way guaranteed and that, even if you can afford to stay the course, your investment journey can be rocky. Ultimately, this example illustrates that – unless you are a speculator who buys and sells frequently – you should view a riskier investment over the longer term, typically five years or more.

There are many factors that affect the share prices of companies, which are outside the scope of this article, including business strategy and success, the ability to pay investors a distribution of profits or reinvest those funds to enhance future company values, and the impact of the political and fiscal environment.

But to go back to our earlier example, during the period shown, the FTSE All Share Index generated returns of 36% and the FTSE All World 71.5%. In comparison, you need about £12.50 today to buy what £10.00 could have bought in 20201, equating to a 25% cost-of-living rise.  

Fund risks ratings

For certain investment funds offered in the UK, the FCA has enabled providers to attach a scale of risk known as the Synthetic Risk and Reward Indicator (SRRI) to their funds, please see Figure 2. Based on the historic performance of the investment this ranges from one to seven, with one representing low risk but potentially low returns, and seven representing high risk with the potential of higher returns. 

1BoE Inflation calculator, accessed on 18 February 2025

A practical approach to investment planning

All organisations and individuals are likely to need a range of approaches to suit their financial needs.

I would recommend you take a systematic approach to make sure that each stage of your short, medium and long-term financial planning is secured in order. Start by covering your day-to-day needs, then consider what you can set aside at least for a short while, only then move to the longer term, where the highest potential rewards are available. This approach will be dictated by your circumstances, including the maturity of your organisation and the funds it has available.

If you are thinking of investing as a charity then our guide to charity investment will help get you started.

For more detailed advice tailored to your charity’s specific needs, you can contact our dedicated experts team at:
T: 03000 123 3444
E: clientrelations@cafonline.org

Disclaimer: This article is for general informational purposes only and does not constitute financial advice. Charities should seek independent financial advice before making investment decisions. CAF Financial Solutions Limited (CFSL) does not provide financial advice and accepts no responsibility for any decisions made based on this content.

Investment involves risk. The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested.  There is no guarantee about the level of capital or income returns that will be generated. Past performance is not a guide to future results.

CAF Financial Solutions Limited (CFSL) is authorised and regulated by the Financial Conduct Authority under registration number 189450. CFSL Registered office is 25 Kings Hill Avenue, Kings Hill, West Malling, Kent ME19 4TA. Registered in England and Wales under number 2771873. CFSL is a subsidiary of Charities Aid Foundation (registered charity number 268369).