Back in the days of irrational exuberance, co-op board directors would occasionally contact me to inquire about investing in stocks to achieve higher rates of return on reserve funds. I believed it was an unwise move then and my advice would be the same today.
A reserve fund represents money that a co-op sets aside for either planned capital improvements or as a safety net to cover unforeseen expenditures that can occur at any time. Accordingly, a co-op should treat its reserves as funds that may be needed in the very near future, for example, in one to two years. For this reason, a co-op should invest with capital preservation as the key investment objective.
A co-op board is comprised of volunteers who are voted to a board to make prudent decisions about general building operations, not for their investment expertise. If a board decides to take a more aggressive posture with its reserves by investing in equities and "hits a homerun" in the process, it is unlikely their shareholders will hold a party to congratulate them. Conversely, if a co-op had committed its reserve fund to the equity markets just prior to the bursting of the stock market bubble, and then, after the market tanked, there was a shortfall in the funds that were earmarked for a major capital project, the more likely response from the shareholders would be to "tar and feather" the board and send them out of town hanging from a rail.
With this in mind, how does a board strike a balance between minimizing risk and maximizing yield on its reserve fund investments?
The three most important things a board should consider when deciding how to allocate its investments are security, liquidity and investment yield. So here is a primer on how to reach these objectives.