The current economic downturn leaves many organizations exposed to market volatility. How should you prepare—or have prepared—for a bear market?
This month alone, the S&P 500 has incurred its 3rd, 6th, and 19th worst three days in trading history (and amidst the wild swings its 9th best). As a percentage of value lost, March 16, 2020 outranks any single day of the 2008 stock market crisis. Just 1987’s Black Monday and one day in the grand old year of 1929 were worse. In total over the past few weeks, the S&P is down around 30% thus far.
I say this not to alarm. After all, the best advice in a swift market downturn is always to hold fast and do nothing. To that end I’ve always enjoyed the advice proffered by an apocryphal “study” by Fidelity, which supposedly found that the investors that performed the best were the ones that were totally inactive—either because they’d completely forgotten they even had a Fidelity account or because they were dead!
But in a bear market nonprofit leaders and fundraisers don’t just have to remain calm themselves, they have to begin worrying about other people’s worries—namely their donors.
In terms of what you do right now in the wake of COVID-19 and the stock market’s movements, there is no special secret. Communicate with donors as much as you can by phone, email, and mailings even when you cannot travel. Use these tumultuous times to reassure donors that you are there for them, that you want to know how they are doing, and implicitly remind them of why they are such a vital part of your mission.
But if you are sweating about your 2020 budget already because huge portions of your budget come from a small number of major donors who hold a lot of stock or a couple of large foundations that may reduce their giving this year in anticipation of poor endowment performance, I urge you to think about the strategy that got you to this point. And to think about taking steps now so that you can be better prepared for the next downturn.
To build a donor base that can withstand major market setbacks, what you need is simple: diversity.
And I mean diversity in two ways: diversity of donors at different levels of giving, and diversity of donors holding wealth in different ways.
Unfortunately seeking such diversity is hard work, and it’s deeply uncool.
How many times have you heard seminar leaders, fundraising books, or mediocre development consultants say some version of the following:
“Look at your donor base as it is now—do you see that just a small percentage of elite donors make up a very large portion of your budget? Then why spend time on the small, difficult to get gifts that aren’t moving the needle? Spend your time and energy on those very top donors who make transformational gifts, and spend your time meeting only new potential donors who can also give at a very high level.
“Look how you are spending thousands and thousands of dollars on direct-mail campaigns and digital ads and emails for a very small return, when every dollar you put into major gifts returns 10 times that amount!”
It’s a very alluring message because what it promises is a big shortcut to fundraising success.
Suddenly, you don’t have to cultivate low- and mid-level donor relationships for years on end as you build up to major six- or seven-figure gifts. You can just find the right large foundations or extraordinarily wealthy people, and you’ll be on the fast track to exponential growth. And it won’t cost much—except for some inspirational talks and “strategy” calls with your slick-haired consultant—so the board and the CEO will love it.
The biggest problem is that this strategy just plain doesn’t work over time. Major-gifts work is more efficient when it is one part of a larger system, fed a constant stream of lower-level donors who’ve already demonstrated commitment and loyalty to your cause. Even very wealthy donors tend to give small first-time gifts—so you need smaller donors even if the majority never make it to the top level of your donor club.
In other words, major-gifts fundraising does have a better ROI than direct mail and annual funds—but it is not an independent part of your fundraising efforts. It depends upon direct mail and other fundraising efforts that create a stable and comprehensive development effort.
To bring things back to the stock market, the other problem is that a lopsided development program that is built entirely around the highest level of gifts is exposed to massive risk.
Having donors with wealth held in investments sounds great for the periods when the market is on the upswing. You can tell donors to contribute stock to save on capital gains. You can tell donors to make IRA distributions to you to fulfill their RMDs. These are real benefits of major-gifts work and a major-donor program.
But when the market sours, suddenly the situation is more precarious. Your hedge-fund-manager board member who regularly gives a mid-six-figure gift is bleeding money left and right. The stalwart foundations you rely on begin slowly cutting back giving to many current grantees in order to focus more funds on local needs related to the outbreak in light of a falling endowment. And major donors as a whole—who are ordinarily your most reliable cohort for renewal gifts—start to get skittish as they see their portfolios declining in value.
A diversified portfolio
So what’s the solution? You need donors whose gifts are not tied to the market. Primarily that is going to mean a large basket of small and mid-level donors who give gifts of $50, $100, or $500 out of their ordinary cash earnings. Some of these donors may hold stock but the key is that the size of their gift is unlikely to alter drastically as long as they continue to be employed. Moreover, the ability to write a $100 or $500 check typically signals stable employment, even in an uncertain economy.
Having a wider base of donors also helps ensure you have major donors—or potential major donors not yet high enough on the giving ladder—who hold their wealth in ways affected differently by a downturn.
In the current market, for example, while most industries are suffering, you will be hurt more if your few major sources of big checks are from the Texas oil industry or Miami cruise ship companies. But you could balance that with those heavily invested in residential real estate, which seems more robust and can benefit from ultra-low mortgage interest rates, or those involved in biotech that could see heavy investment in light of the coronavirus outbreak.
I’ll thrown in some praise, too, for the very quirky donors that few fundraisers relish meeting with: the guy who stacks gold bars in a bunker in South Dakota. Or the couple who is all in on their obscure Russian art collection and, based on your meeting notes, has predicted twelve of the last three recessions.
Many more donors, at all levels of giving, from all sources of wealth. It may feel like too little too late today, but this is the strategy for recession-proofing your fundraising far into the future. And, while it may not feel like it at some moments, a future there will be—and we’ll need your organization active and thriving again.