--- title: "The Three-Bucket Approach to Balance Investment and Liquidity in Association Reserves" id: "11925" type: "post" slug: "the-three-bucket-approach-to-balance-investment-and-liquidity-in-association-reserves" published_at: "2016-06-07T00:00:00+00:00" modified_at: "2026-03-15T02:50:16+00:00" url: "https://associationsnow.com/2016/06/07/the-three-bucket-approach-to-balance-investment-and-liquidity-in-association-reserves/" markdown_url: "https://associationsnow.com/2016/06/07/the-three-bucket-approach-to-balance-investment-and-liquidity-in-association-reserves.md" excerpt: "Recent market volatility, coupled with the 24-hour news cycle, can throw even the most seasoned investors off course. Nonprofit investment committees are not immune to these psychological pressures, either, and can be tempted to react to short-term market declines in..." taxonomy_category: - "Organizational Strategy" taxonomy_post_tag: - "ASAEcenter" - "Asset Management" - "C-suite" - "investment" - "liquidity" - "nonprofit" taxonomy_content_format: - "Article" taxonomy_role: - "Association CEO / Executive Director" - "C-Level" - "Executive Team" taxonomy_persona: - "Executive Leadership" --- [Home](https://associationsnow.com/) » [Articles](https://associationsnow.com/format/article/) » The Three-Bucket Approach to Balance Investment and Liquidity in Association Reserves Recent market volatility, coupled with the 24-hour news cycle, can throw even the most seasoned investors off course. Nonprofit investment committees are not immune to these psychological pressures, either, and can be tempted to react to short-term market declines in an effort to “protect” the organization. However, this short-term thinking can be detrimental to long-term returns. To be better prepared to navigate periods of market stress, it is important to maintain perspective on the goals, objectives, and time horizon of any investment portfolio. Clearly defining and articulating an association’s goals, objectives, and time horizons in an investment policy statement is a critical first step. This should be done for each pool of money, whether the money has a short-term timeframe, a long-term timeframe, or somewhere in between. > The beauty of the bucket approach is the simplicity it offers to manage planned and unplanned liquidity needs. To manage portfolios with different time horizons and risk profiles, many nonprofit organizations utilize the bucket approach. ### Bucket 1: Short-Term Cash Short-term cash is essential to any organization’s day-to-day management. With cash yields close to zero, this bucket yields little return. However, the goal of these funds is to preserve principal for immediate liquidity needs. Appropriate investments include money market funds, checking accounts and savings accounts. When evaluating how much to allocate to these short-term vehicles, it is important to consider anticipated or budgeted liquidity needs and potential liquidity needs that arise from unexpected or “surprise” events. Short-term needs vary based on the organization but, for context, the average university endowment with under $25 million has 8 percent in short term investments, [according to the National Association of College and University Business Officers (opens in a new tab)](http://www.nacubo.org/Documents/2015%20NCSE%20Press%20Release%20%20FINAL.pdf) [PDF]. (We turn to NACUBO because the largest endowments and foundations tend to set trends for other nonprofit organizations, including trade associations.) The following table outlines types of short term investments organizations can utilize: | Immediate needs | Longer-term needs | | --- | --- | | Money market funds Checking accounts Savings accounts T-bills | Longer-maturity T-bills Brokered CDs U.S. government agency bonds Corporate bonds Municipal bonds Short-duration bond funds | | Source: Vanguard, “Managing cash in your portfolio (opens in a new tab)” [PDF], October 2012 | | ### Bucket 2: Mid-Term Funds Mid-term goals include money not needed for immediate purposes, but which may be needed within one to three years. These funds could be for specific board designated goals, projects a few years down the road, or additional savings that the organization isn’t ready to move to the long-term bucket. Investment options for these funds include certificates of deposit, short-term bonds, or bond funds with slightly higher yields and longer maturities than in Bucket 1. It’s not appropriate to invest these mid-term funds in stocks, as your cash needs may coincide with a market downturn and potential investment losses. ### Bucket 3: Long-Term Investments This long-term portion of your organization’s portfolio typically represents reserves with a minimum time horizon of three to five years. NACUBO’s [research (opens in a new tab)](http://www.nacubo.org/Documents/EndowmentFiles/2015_NCSE_Public_Tables_Asset_Allocations.pdf) reveals organizations following a continuing trend of lower fixed income allocations and higher alternative investments. The appropriate allocation should be evaluated based on the organization’s long-term objectives and risk profile as defined by its investment policy statement. This usually includes exposure to global equities, bonds, real estate investment trusts, and hedged investment strategies. Larger organizations may include a private equity allocation, real estate and hedge funds, and asset classes with higher expected returns but with less liquidity and transparency. The beauty of the bucket approach is the simplicity it offers to manage planned and unplanned liquidity needs. Buckets 1 and 2 are funds that are readily accessible for needs over the next few years. For most organizations, a portion of Bucket 3 would also be accessible too, particularly in a well-balanced portfolio where there are likely to be asset classes that hold their value during a market downturn, such as long-term bonds or long/short funds. In certain circumstances, the long-term portfolio could also be used to borrow against in the form of a margin loan (a loan against the value of securities) at rates comparable to, or lower than, a line of credit. Nonprofit organizations should take a holistic approach to their cash needs and investment portfolios. By evaluating their combined portfolios under multiple lenses to understand and plan for anticipated liquidity needs and potential stressors, nonprofit investors can position themselves to enjoy the opportunities and rewards from a longer-term orientation. The bucket approach may help organizations maintain liquidity and maximize returns by identifying the appropriate time horizon and risk profile for their various sources of funds. *The information included in this article is not intended to be used as the primary basis for making investment decisions. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance.* *RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC* [Ann Marie Etergino](https://associationsnow.com/author/ann-marie-etergino/) Ann Marie Etergino, CIMA, is a managing director – financial advisor in the Institutional Consulting Group at RBC Wealth Management in Chevy Chase, Maryland. 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