How should we invest our Reserve Fund?

We frequently get the question on what should we do with reserves especially with recent inflation increasing costs.

Washington State’s Laws governing associations (RCW 64.34) is pretty clear. They don’t have any restrictions other than an association needs to have a separate reserve account.
So the board has a lot of latitude on what they can do to generate some income with reserves funds as a hedge against inflation. 

1. Your duty to the association members…..

A board member’s purpose is to make decisions in the best interest of the community. That also includes the management of association reserves. Investing reserve funds can be the best move you can make given the current economy if you can minimize the downside risk.  For this reason, a lot of associations will go with investments like CD’s  or money markets. Although this protects the principal, these types of investments may not grow as much because they are lower risk. On the other hand, it’s a more secure decision that saves your principal and can still earn you some extra cash.

2. What do you CC &R’s say?

Check your governing documents, as they may include a policy on investments regarding your reserves. The language used in these documents are often vague if they show up at all. So, even if they are included, it’s a good idea to speak with an association manager, accountant, or attorney to be sure the money is consistently handled. It’s also a good way to ensure that everyone is aware of any policies on investments.

For the record, many HOA policies on reserves will make it a simple matter for the board to invest as long as the principal isn’t touched.

3. Board member knowledge

Not everyone on the board will have a background in investing or finances. If this is the case for most of your  association board, you can hire an investment advisor with experience working with associations. This is especially helpful if you have large reserves.  Every association should have an investment policy even if its not in governing documents.

Factors to consider

1. Capital preservation –  Your  associations reserves are integral to the continued operation of your association. Therefore, you must ensure capital preservation and avoid loss. However there is a balance between risk and investment growth.  Bank savings accounts, treasury bills, and certificates of deposits (CDs) are usually the safest. In contrast, stocks, mutual funds, municipal bonds, and non-government bonds usually pose the higher risks but can generate returns.

2. Liquidity –  When creating your policy, make sure to emphasize the importance of liquidity. If your reserves are locked in long-term investments, then you can’t immediately access the money for its intended purpose. This will force your association to impose special assessments or outside lending.

3. Yields – The goal should be safe growth. Although bank savings accounts are very low-risk, they also don’t give you much in yield. Many associations typically go with certificates of deposit as opposed to high-risk, high-reward investments.