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Investment Options

We have a new Board. They want to take our Reserve funds and “invest” the money.

Are there AZ laws that restrict investment choices for HOA Reserve funds? We’ve used CD’s and Money Markets in the past, but what about other investment ideas that have some level of downside risk, like the stock market, mutual funds, etc.

3 Responses

  1. DennisL

    Fish7,

    There are no laws relative to financial decisions of boards. The standard of financial responsibility is that the board decisions should be based on a what would an ordinarily prudent person do in the same situation. I would never trust any management company to make investment decisions for an association in any way, they can barely handle basic accounting let alone active investment management. There are firms like Vanguard that allow you to invest in nearly unlimited mutual funds and ETF at whatever risk level you desire. For a board to decide to invest the reserve funds in a bond based mutual fund that returns on average 4 to 5% growth every year is a wise decision as long as it is monitored by the association treasurer carefully. You can move money between these mutual funds to a cash account on a daily basis without cost if you have satisfied the minimum investment value for the firm. There are absolutely no guarantees in investments but if you acknowledge this going in you can double you reserve fund in 10 to 12 years without increasing assessment on the homeowners.

    I personally manage my retirement assets in this way with excellent returns and very little work without any transaction cost. I can take money out of those investment and have them available in my bank account in 2 days.

    In my opinion most HOA Board shy away from investments because they don’t want to bother with active management and the fact that the funds are not federally insured. FDIC insurance is limited to $250,000 per bank (not bank account) and is based only on bank failure which is extremely unlikely. I’ve seen associations with a million dollars in reserve funds in multiple accounts in the same bank not realizing that most of that money is not insured. So, they settle for CD’s or simple savings accounts that yield interest of .2 to .5% on an annual basis.

    What a board is willing to do relative to investments is up to that board, but in my opinion not using low risk investment bond based mutual funds in their reserve strategy is a disservice to the community that they serve.

    Dennis

  2. Fish7

    Dennis,

    Thanks for the detailed response…

    Regarding your return and claims, that is classic, and based on historical 15 – 20 year annualized return on many bonds is in the 4-5% range……AFTER AN HISTORIC BOND RALLY. Unfortunately, we do not live in history and interest rates are near zero. when I look at bond funds, I do not see 4-5% returns any more — more like 1-2% or so, which means doubling every 35 years or so. What bond funds do you have that are yielding now 4-5%?

    Bond funds do go up/down…. For example, the more suitable “safe” bonds are DOWN -1.5% ytd. And interest rates have barely begun to move higher (with three rate hikes now expected in 2022). Perhaps our economy will slow down and rates decline from here leading bond prices higher. But perhaps not.

    The bond market offers an unfavorable risk/reward at this point in time and it’s highly unlikely that an HOA will achieve its objectives while interest rates are going higher in 2022.

    More likely our Treasurer will monitor the mutual fund’s NAV daily closely and will freak out when it declines. She will report back to the HOA board that the fund has fallen in value and everyone will look at each other for direction. I don’t think this will end well.

    FWIW

  3. DennisL

    Fish7

    I’m not here for investment advice, and I will surely not post on this site my personal investment choices. If your board is so unfamiliar with the art of investment in mutual funds that minor fluctuation in the annual or monthly or worse yet daily performance will cause panic, then they have absolutely no place in the investment world. Mutual funds whether they are stock based or bond based or any combination thereof, are a long-term investment strategy and holding thru volatility is always the best outcome.

    Dennis

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