About…. Budgeting
How can grantmakers draw up stable budgets when their investments are volatile?
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By Sharika Sharma, Head of Business Development, CCLA Investment Management Limited
Does anyone need reminding that the value of investments can go down as well as up? In the past 12 months, share prices have risen 15%[1]. But, some months, they’ve fallen 5% and other months, they’ve risen 6%. In the past 10 years, share prices have gone up over 20% some years (in 2017, 2019, 2021, 2023) and down 10% (in 2018) or more (in 2022).
Risk is a fact of life, and investing is no different. It usually won’t be crystal clear what investment income you should budget for in the coming year. But there’s a solid body of best practice that can help you make the best possible decision.
1) Avoiding investments altogether unlikely to be an appropriate solution.
Some trustees like to ‘solve’ the issue of risk by getting rid of investments altogether, and by moving their charity’s reserves to a bank account. These days, instant-access bank accounts return around 2% per year.[2]
However, 2% is nowhere near the current 3.8% inflation[3], so keeping money in a bank account reduces its real value. And 2% falls well short of the average 12% p.a.[4] that the stock market has returned over the past decade. On a £100,000 investment, that’s a £10,000 difference to your budget every year. Good stewardship, the Charity Commission’s guidance states,[5] isn’t about avoiding risk altogether. Instead, it involves deciding what level of risk is acceptable for your charity and, given that risk, considering what financial return you can achieve.
To balance risk with return, most charities hold diversified investment portfolios, which combine riskier and less risky investments. For example, combining bonds and shares often achieves the desired level of risk that a charity wants to take to achieve its return objectives. Diversifying investments can also generate more predictable returns over time.
If you understand the volatility of each asset class, you’re less likely to run into budget shortfalls. Monies you need within one or two years should be invested more conservatively, for example in a money market fund and/or a bond fund. Monies you need five or 10 years from now are likely to do better if you invest them in a portfolio that includes shares.
2) Will you spend only the income from your investments, or some of your capital as well?
Income from investments is reasonably predictable, in the short term. Bank accounts currently pay around 2% per year. Ten-year UK government bonds currently pay around 4.65%.[6] And the average dividend yield on shares, in the past five years, has ranged from 2.5% in developed markets to 3.6% for US shares.[7]
In addition to interest or dividends, however, the value of your investment itself could increase. Rising share prices are one example of such capital growth in recent decades.[8]
As a result, reasonable investors may want to count some of that capital growth into their budgets. But how much capital growth should investors include in their budgets for coming years, when it is – by definition – uncertain and variable?
3) Smoothing investment returns for inclusion in your budget
You could include all of this year’s capital growth in your next year’s budget. And if, next year, the value of your investments falls, you could reduce this line to zero. But, of course, budgeting like that, from year to year, makes for big swings in your budget and will undoubtedly make running your charity’s operations more difficult.
Instead, you could use your capital’s average growth, in the last three or five years, in next year’s budget.
As the graph above shows, using an average number based on the last three years smooths out the capital growth included in your budget. As a result, your budget should be more stable from one year to the next, with fewer ups and downs.
4) Build in safety margins
In addition to smoothing your budget, you could include a safety margin in your calculations. For example, if your average annual return over the past three years was 8.6%, as in figure 2, you could budget to spend just 7.6% of your investment, a 10% safety margin.
And if you’re heavily invested in, say, shares, you could increase that safety margin to 20%, because share prices are more variable than most bond prices or cash. That way, you’re less likely to run into surprises. In general, your safety margin should increase the more volatile your investments and/or the shorter your time horizon.
Using a safety margin means not using all of the investment returns you hope to receive. If, instead, you realise an unexpected surplus, you can add this to your reserves or spend it on ad hoc projects.
5) Scenario planning
Depending on what you’re invested in, you will have a fair idea of your portfolio’s variability. Your investment in a money market fund, for example, will be close to Bank of England’s Official Bank Rate, currently 4%. .
Your investment in a stock market fund, by contrast, will be more variable. By historical standards over the past 10 years, next year’s returns are 68% likely to lie between -4% and +27%.[9]
For such variable investment portfolios, it is good practice to estimate a base case scenario, but also an optimistic and a pessimistic scenario. This can help with contingency planning and with discussions at board level.
6) Lay down your approach in an investment policy statement
Whatever approach you take is worth committing to paper. An investment policy is a useful reference tool, to remind all stakeholders of the approach they’ve decided on.
Your investment policy will also help you draw up next year’s budget. It will tell you your charity’s agreed time horizon for its investments, and the commensurate level of risk to take with your investments.
As a result, you’ll know how much variability you should count with in your budget. Maybe it will be necessary to build in safety margins? And, if your investment returns are variable, maybe scenario planning is an appropriate tool?
Whichever approach you take, you’ll want to be realistic and prudent when budgeting for coming years.
And don’t forget that help is at hand. Reach out to ourselves or other investment managers, to your advisers, or to your accountants. Most are happy to share their know-how and previous experience.
[1] As per the MSCI World Index, in local currency. The MSCI World Index is one of the broadest share indices worldwide. With 1,320 constituents as of 29 August 2025, the index covers approximately 85% of share values in 23 developed markets.
[2] ‘Money and Credit – April 2025’. Bank of England, 2 June 2025
[3] ‘Consumer price inflation, UK: August 2025’. Office of National Statistics.
[4] As per the MSCI World Index, in local currency, calendar years 2015-2024.
[5] ‘Investing charity money: a guide for trustees (CC14)’. Charity Commission for England and Wales, updated 1 August 2023.
[6] Source: Bank of England
[7] Sources: MSCI World Index for developed-market shares, Standard & Poor’s 500 for US shares
[8] ‘About … Total Return Investments: why investment income is no longer a good predictor of grantmaking’. UKGrantmaking (https://www.ukgrantmaking.org/blog/about-total-return)[9] Based on a standard normal distribution of share price returns.