While associations may be anxious about their investments given the market’s recent ups and downs, experts says such volatility is pretty normal. But to make sure they can handle these changes, groups should be assessing how their assets are invested.
The market’s ups and downs in the last year or so have left many investors anxious. But it’s important for associations that might be getting uneasy about their investments to understand that this is common in the bigger picture. “Volatility—even the kind of volatility that we’ve seen here over the past three months—is pretty normal,” said Ahmed Farruk, senior consultant with DiMeo Schneider & Associates.
In 2017, “there was basically no volatility at all,” Farruk said, and every month was a positive one for stocks. ”So some investors may have gotten conditioned to the idea that markets kind of always go up—which is certainly not the case.”
But, to make sure they can weather changes in the market, associations should be looking at how their assets are invested “and making sure that those tie to their longer-term objectives and to the time horizon of the funds,” Farruk said. For example, if you have a long-term portfolio and have set it aside for long-term growth, but you’re fretting about the value going up or down from day to day, maybe it’s time to question whether it’s really long term.
“What many of our organizations have done is segmented their reserves into multiple pools, so you might have a long-term reserve that is truly long-term growth, and you’re not really going to worry about it or even look at it over the next three to five years,” as well as an intermediate-term fund that’s much more conservative and has a much shorter time horizon, Farruk said. Then if the association needs to dip into reserves, they can use the intermediate fund, and not worry about the markets going up or down too much.
“As associations are trying to diversify their revenue streams, trying to be strategic, and trying to think about what the association looks like for next 10 years,” they might anticipate a strategic acquisition or some other change coming up, Farruk noted. In that case, it’s helpful to talk about how the association’s reserves can be used or how it might want to look at its pools of assets differently, he explained.
Also, Farruk said the tried-and-true advice of staying diversified remains good advice. This includes staying diversified across asset class, industry sector, style of investment, and country borders—and using stocks, bonds, and alternative investments.
Associations face some issues that other nonprofit investors don’t, such as answering to members. Sometimes, associations have built up large reserves and have grown them over time, “which is great, financially, but it opens them up to members,” Farruk said, questioning why they are keeping such large reserves—and arguing that the money should be used for something like reducing dues.
In assessing investments, Farruk said benchmarking can also be helpful—particularly, looking at investments from three lenses: governance structure, investment strategy, and performance. Benchmarking can help associations gauge whether their investments are pretty much in line with what their peers are doing—or whether they’re outliers and their investments might be more subject to criticism.
What is your association doing with its investment strategy to ensure it can weather market volatility? Please share in the comments.