Investment policies

Why put it in writing

Boards turn over. A treasurer who spent a career in banking might understand CDs, money market funds, and Treasury bills without being told. The next one might not. A written investment policy means the rules for handling reserve money do not reset every election, and they do not depend on whoever happens to hold the checkbook this year.

It also gives the board something to point to when a bank, a broker, or a well-meaning vendor pitches a "better" product. Instead of a one-off judgment call, the question becomes: does this fit the policy the board already adopted?

Safety, then liquidity, then yield

A widely used model for public and quasi-public investment policy, built by the Government Finance Officers Association, ranks objectives in a fixed order: safety first, liquidity second, yield third. Practitioners advising HOA boards on reserve investing point to the same order. Preserving the principal, and being able to reach the money when a roof or a boiler fails, both outrank a better interest rate.

In practice that means a small yield advantage is never a reason to lock up reserve funds past the date your reserve study says you will need them. Reserve study timing should drive maturity choices, not the other way around.

What the policy should actually say

A useful policy is specific enough to act on. At minimum, cover four things.

Allowed products. Name what the board may use: bank money market deposit accounts, CDs, and Treasury bills. A money market deposit account at a bank is a different thing from a money market mutual fund at a brokerage: the deposit account is FDIC insured, the mutual fund is a security and is not. The policy should say which one the board means.

Diversification. Set a rule for staying under the FDIC coverage limit at any one bank, or for using a deposit-placement service that spreads a large balance across a network of banks while the association keeps one banking relationship.

Maturity. Ladder maturities against the reserve study, not against whatever term pays the highest rate. Treasury bills come in terms from four to 52 weeks and can be sold before maturity if plans change; a CD typically cannot be cashed out early without a penalty.

Approval and review. Who must approve the policy, and how often the board must revisit it, is set by your governing documents and, in some states, by statute. Confirm the requirement in your bylaws before assuming a default.