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Adventures in Philanthropy: Three Wall Street Mistakes

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What not to learn from the world of finance.

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Editor's Note: Eric Kessler and Hilary Cherner work at Arabella Philanthropic Investment Advisors, a national philanthropy consulting firm that works with individual philanthropists, family foundations, institutional donors, and corporations to make their giving more effective. Mr. Kessler and Ms. Cherner are based in Arabella Advisors' Washington, DC office.

Last month, we wrote about applying practices from personal finance to philanthropy in order to more strategically meet the growing needs of the charitable sector. There are indeed many similarities that can be drawn between private and charitable investing. But, with daily headlines about the failures of financial giants such as Lehman Brothers, Bear Stearns, and Merrill Lynch -- and the troubles faced by AIG (AIG) -- one should exercise caution when borrowing practices from the financial world. In fact, there are several specific practices of private investment that should not be applied to your charitable investments.

Practice 1: In Philanthropy, Diversifying to Mitigate Against Risk Isn't The Right Approach

Diversification helps guard against risk, as anyone who let Bernie Madoff control their retirement savings learned the hardest way imaginable. While investing in numerous nonprofit organizations is commendable, don't give to more organizations just for the sake of casting a wide net. You won't be increasingly your likelihood of success; instead you'll just be limiting organizations' ability to build capacity.

Instead of diversifying charitable donations across multiple organizations and issue areas, high-impact philanthropists should select a small number of issues and organizations in which to invest, building strong and supportive relationships along the way.

Practice 2: With Charity, Long Term Returns Are Better Returns

While people debate the best strategy for investing, there is no questioning that day trading has proved lucrative for at least a select few. The likelihood of instant return in the philanthropy investments?

The bigger the return on investment you are seeking, the longer you should expect it to take. Whether supporting your alma mater's new research center or addressing domestic hunger, most nonprofit organizations you support are working to address complex problems, within a complex landscape that require complex solutions; they also don't have one simple metric against which they can quickly and easily measure their performance. When making charitable investments be realistic about the timeline for results.

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