As an association management company, we are interested in presenting our clients with smart financial options. One thing we consistently monitor is when associations have enough cash to take advantage of some investment options. Circumstances can change quickly, certainly during the current economic state of the market, so these decisions can seem daunting. However, whether it’s 2021 or post-pandemic, investing decisions should be based on the same facts. Here is what you need to know to make good investing decisions and maximize opportunities for your association.
Does the Association Have Enough Cash?
The answer to this question can certainly be interpreted several ways and requires some careful thought. The first place to look is the current and historical cash balance. Has there been a minimum balance maintained for some time, indicating that the association’s cash is stable?
In addition, consider the overall balance sheet. What amounts are due to be collected and paid? How much equity does the association have?
Also, what are the short and long-term priorities of the association? Borrowing from the short-term goals to take advantage of investment opportunities might not be the best idea, especially at a time where markets are volatile.
What Are the Cash Needs in the Next Few Years?
It is crucial that you consider the cash needs of the association for the next few years. This will allow you to determine the period of time in which cash could be invested, and what kind of investment will get you the best rate of return. Generally, the longer the period of investment, the higher the rate of return will be.
For information about how to manage cash flow and predict future cash flow needs, read my previous article, Managing Cash Flow During a Crisis. This article provides tips on how to forecast future cash needs.
When is the Right Time?
Do not wait for the absolute right time to present itself to you, because it will never come. Often, investors will wait for markets to be low or on the climb, but unfortunately it does not work that way. These are changes that cannot be determined until after they have happened.
An association’s specific circumstances should indicate the time to invest, not the performance of the markets. Markets will always fluctuate! Remember, it’s about the amount of time you can invest for, not the timing of the investment that matters most.
What Are the Options?
Investing can be confusing and daunting, so let us try to make this simple!
In addition to knowing when the right time to invest is, it is important to decide how much risk the association should take with their investment. There are several factors in this decision and there is not one correct answer. Risk tolerance will help decide on whether the association should invest in stock (equities) and/or bonds (fixed income). At a high level, a portfolio with 100% stocks has the highest expected return over the long term but will be much riskier in the short term. Bonds, however, lower the expected long-term return of the portfolio but can protect your investments from losing too much value. What you are trying to achieve is balance between the market conditions.
Those are just a few of the options. My personal recommendation for getting started is to contact a bank/investment advisor you believe you can trust and discuss the options specific to the circumstances at hand. They will be able to guide you with firsthand knowledge and listen to your specific needs and preferences, helping you achieve the financial goals of your association.