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Subject: Investment recommendations for reserves funds?
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Author Messages
ChrisS24
(California)

Posts:8


03/24/2021 9:57 AM  
Hi all --

Do you have recommendations (or guidelines) for how $ in reserves should be invested, in conservative good yielding investments? Our board has quite a large $ reserve, and getting just a few % return per year would be a nice help to our revenue.

Are there rules about this, or recommendations on how to handle investing these funds?

Thanks!
JohnC46
(South Carolina)

Posts:10944


03/24/2021 12:12 PM  
Chris

Few BOD's would do anything risky. After all, it is not their money. I suggest CD's.
CathyA3
(Ohio)

Posts:1881


03/24/2021 12:34 PM  
There are no conservative, good yielding investments - there is always a trade off between risk and reward. In other words, the higher the yield, the more likely that something undesirable may happen. Stocks yield more because investors are paid for the risk of losing money (there's more to it than that, but in general this is the case).

An HOA's board's main goal should be preservation of principal, since they need the money when they need it. They can't wait for financial markets to move the way they want them to.

This means limiting themselves to fixed income investments such as money market accounts, certificates of deposit (CDs) and Treasuries. Bonds may be OK if they're held to maturity and the risk of default by the issuing agency is as close to 0 as you can make it. With bonds, there also is typically a trade off between length until maturity and the coupon rate (eg. a 30-year bond pays more interest than a 10-year bond) - but this isn't always the case.

After many years of near 0% interest rates, the interest on any of these investments is extremely low, although things may be loosening up a bit.

Rule of thumb for anyone who invests money: the markets can stay irrational longer than you can stay solvent. So... fixed income only. I view anything else as a breach of the board's fiduciary duty.
ChrisS24
(California)

Posts:8


03/24/2021 12:36 PM  
Thanks for that info. Yes I do agree all yields are low right now.

What specific vehicles or etc. is reasonable to use, if your funds are being stored in a commercial bank account? CDs? Or divert some to a brokerage holding for treasuries? Do banks offer the ability to invest in your above suggestions simply through a normal commercial bank account?
KellyM3
(North Carolina)

Posts:1695


03/24/2021 12:38 PM  
The reserve fund is not really to be invested for returns so:

1. Money Market
2. A CD Ladder

However, you know your HOA and community's risk tolerance best.
MarkM19
(Texas)

Posts:790


03/24/2021 12:49 PM  
Chris,
The best plan of action is to take the safe CD route. I always suggest laddering multiple CDs so that one is maturing every quarter. Not sure how much assets you are actually talking about but normally you can get 100k or 50k Cds at any banking institution. If all the money is currently in a checking account you could start with a 3 month, 6 month, 9 month and 1 year CDs. When they mature you change them to 1 year CDs that auto renew if no action is taken. Remember if you are contributing monthly or quarterly to reserves new money will always be coming in the Cash reserve account. I also would have what every your Reserve Study has suggested annual spending left in a Cash account. The long term money is best in the best rates you can get on one year CDs.

As others have mentioned your job as a board member is to protect those funds so they are easily accessed when needed.
CathyA3
(Ohio)

Posts:1881


03/24/2021 12:55 PM  
Posted By ChrisS24 on 03/24/2021 12:36 PM
Thanks for that info. Yes I do agree all yields are low right now.

What specific vehicles or etc. is reasonable to use, if your funds are being stored in a commercial bank account? CDs? Or divert some to a brokerage holding for treasuries? Do banks offer the ability to invest in your above suggestions simply through a normal commercial bank account?




You can buy Treasuries from federal reserve banks or online through TreasuryDirect.

If you do go the brokerage route, make sure you buy Treasuries as individual securities, not inside things like mutual funds or money market funds.
ChrisS24
(California)

Posts:8


03/24/2021 1:13 PM  
Thanks, we'll look carefully into the CD + treasuries!
ChrisS24
(California)

Posts:8


03/24/2021 1:51 PM  
Although, just doing some poking around rates are so poor across the board lately, like 0.1% per year. For tying up $100,000, you get $100 for that privilege.
MarkM19
(Texas)

Posts:790


03/24/2021 1:58 PM  
Chris,
We all see the same rates as you are seeing. As a board member you are a Fiduciary meaning you are not and investor. Look up the definition and live by it. Your job is to manage with as little risk as possible. Rates will go up and more interest will be made at that point. If you want to find ways to make money look at your existing contracts and get them re bid and look at cost savings as a form of saving money. Trust me you do not want to risk your HOAs reserves wildly. You are a volunteer and the only way you can get in legal trouble would be to do something outside the norm with those funds.
KerryL1
(California)

Posts:8015


03/24/2021 2:11 PM  
I know little about this, but, Chris, visit Davis-stirling.com, a site by CA HOA attorneys to see the legal limits (I think) on where you can invest as an HOA.
JohnC46
(South Carolina)

Posts:10944


03/24/2021 2:30 PM  
Posted By MarkM19 on 03/24/2021 1:58 PM
Chris,
We all see the same rates as you are seeing. As a board member you are a Fiduciary meaning you are not and investor. Look up the definition and live by it. Your job is to manage with as little risk as possible. Rates will go up and more interest will be made at that point. If you want to find ways to make money look at your existing contracts and get them re bid and look at cost savings as a form of saving money. Trust me you do not want to risk your HOAs reserves wildly. You are a volunteer and the only way you can get in legal trouble would be to do something outside the norm with those funds.



Well said.
MichaelS56
(Minnesota)

Posts:179


03/25/2021 6:40 AM  
John has a very good answer.
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