Top 3 Mistakes HOAs Make with Investments

Investing wisely is crucial for Homeowners Associations (HOAs) to ensure the financial health and sustainability of their communities. However, many HOAs fall into common traps that can lead to costly mistakes. In this blog post, we will explore the top three mistakes HOAs make with their investments: improper CD laddering, not participating in the open market, and neglecting high-yield accounts like money market accounts. We will also discuss how having a financial fiduciary can help represent the HOA's interests throughout the investment process.

Understanding the Natural Depreciation of Money

It is vital to understand how inflation affects money. On average, inflation causes money to lose value at a rate of about 2-3% annually. This means that if your HOA is not earning at least this amount on its investments, it is effectively losing money each year. For example, if an HOA has $100,000 in investments, not earning a competitive interest rate could mean losing between $2,000 to $3,000 in value annually.

Failing to grow funds can lead to significant shortfalls in the HOA's financial resources over time. This can impact essential community projects, maintenance, and the overall quality of life for residents and often leads to Special Assessments that cause unnecessary financial stress on home owners.

Mistake 1: Not Using Money Market Accounts or High-Yield Accounts

Many HOAs overlook money market accounts or high-yield accounts, which often provide higher rates than traditional savings accounts. For instance, a money market account typically offers rates around 0.5% to 1.5%, compared to just 0.01% for average savings accounts, depending on the financial institution.

Neglecting these accounts means HOAs lose out on interest income that could offset the natural depreciation of money. When considering high-yield options, HOAs should compare interest rates, fees, and accessibility. Talk with your HOA Financial Advisor about the options available as they often have access to better high yield accounts than typical banks do. This proactive approach can help ensure financial stability and growth.

Mistake 2: Improper CD Laddering

One of the most common mistakes HOAs make is improper Certificate of Deposit (CD) laddering. CD laddering spreads investments across multiple CDs with varying maturity dates, allowing for both liquidity and higher interest rates than traditional savings accounts.

Many HOAs structure their CD ladders poorly. Some might invest too heavily in long-term CDs, effectively locking away funds they could use for maintenance or emergencies. Others may stick to short-term options, limiting their growth potential in favor of liquidity.

For instance, an HOA could benefit from having a mix of CDs that mature at different times. By doing so, they can access some funds for immediate needs while still capitalizing on higher rates offered by longer-term CDs. A well-structured ladder can yield returns of 1.5% to 2.5%, depending on the terms chosen.

Mistake 3: Inability to Properly Participate in the Open Market

Another costly mistake is the inability to participate in the open market. Many HOAs avoid investing in stocks, bonds, or mutual funds due to concerns about market volatility. However, missing out on these opportunities can result in lost potential returns.

Investing in the open market allows HOAs to diversify their portfolios but it needs to be done correctly. Protection of the funds must be the highest priority while still finding ways to properly grow the funds on the open market. An HOA Financial advisor is highly recommended as they can help you find the best investments available for your HOA's needs. Participating in a strong investment vehicle should be the goal of all healthy HOA's. For example, an HOA that invested $50,000 in a mixed portfolio and might see an average annual return of around 8-10%. This could significantly exceed the returns from a standard savings account or a CD, particularly over a longer time frame.

To safely navigate the open market, it's beneficial for HOAs to work with an HOA financial fiduciary. These professionals, alongside HOA financial advisors, can help boards evaluate market trends and develop a tailored investment strategy that aligns with their goals.

The Importance of a Financial Fiduciary

Navigating HOA investments can be challenging, making a financial fiduciary essential. A fiduciary acts as an intermediary between the HOA and financial institutions, ensuring the HOA’s needs are prioritized throughout the investment process.

Fiduciaries offer expertise that can help HOAs avoid mistakes. They can guide boards in making informed investment decisions that align with their financial goals. With a fiduciary on board, HOAs benefit from continuous support and strategic planning, regardless of changes in the management team.

By partnering with a fiduciary, HOAs can enhance their chances of successful investments and long-term financial health.

Key Takeaways for HOAs

Investing wisely is vital for the financial health of HOAs, yet many fall into common traps that hinder their growth. By avoiding the top three mistakes—improper CD laddering, not participating in the open market, and neglecting high-yield accounts—HOAs can better position themselves for success.

Additionally, working with a financial fiduciary can provide the expertise and guidance needed to navigate the investment landscape effectively. By taking these proactive steps, HOAs can ensure that their funds are preserved and grown, ultimately benefiting the entire community.

Understanding and addressing these common investment mistakes can lead to a more financially secure and thriving community.