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December 19, 2016 Article 3 min read
After Brexit battered global financial markets in the second half of 2016, we were reminded that after eight years of relative market stability, we’re likely due for some old- fashioned volatility, which is why it’s important for associations to reexamine their investment portfolio.

Consider this potential sequence of events: Market volatility rises, markets sell off as a result of uncertainty, and the global economy slows or enters a recession, as unemployment rises. As a result, association memberships could drop off, revenue from membership dues could decrease, and conference registrations—another major source of revenue for many associations — could dwindle.

While these circumstances are rare, associations that fail to plan ahead may find themselves in financial difficulty.

The good news is that well-run associations know how to deal with hard times, often by cutting back on conference offerings, simplifying mailings, or reducing staff. However, long before such actions become necessary, associations can take steps to ensure that they’re prepared to weather various economic conditions.

  1. Access a line of credit.
    The time to borrow money is when you don’t need it. Money is cheap and plentiful today, but if you wait until your association really needs it, funds might not be readily available. Thanks to years of near-zero interest rates, yields on U.S. Treasuries are at generational lows. Financially strong associations can access lines of credit, potentially accessing money at low interest rates to help smooth their cash flow. A line of credit also allows your association to keep funds invested, rather than having to sell investments at an inappropriate time. And in many cases, investments may yield more than the cost of a line of credit.
  2. Manage your money right.
    Associations should make sure that cash and equivalents are matched to the timing of their potential use. For example, cash that isn’t needed for six months can be placed in investments that will generate a yield higher than funds held in a money market or bank account. Matching the duration of assets with potential liabilities can help maximize the yield on your association’s assets.
  3. Understand your financial obligations.
    The association’s investment committee should consider the amount of the investment portfolio that is permanently restricted — and therefore has some principal restrictions — compared to funds that are unrestricted. This provides a clearer assessment of balance sheet liquidity and the portfolio’s flexibility to support the association.
  4. Create financial models.
    Consider the range of forecasted revenues from operating activities in both positive and negative economic scenarios. Assessing the association’s cash needs based on the modeled revenue streams creates a clearer picture of how the investment or cash portfolio should complement operating revenue. Remember: If revenues are falling as a result of a difficult economy, the investment portfolio might also suffer—as so many did during the Great Recession. Keeping these potential scenarios in mind, it’s important to ask: How much return will you need on your investments to support the organization? How much volatility are you willing to take on to achieve it? And what investment allocation does that imply?

Answering these three questions will place the association strategically in a much better place, no matter what economic or investment market scenario occurs. Perhaps more than anything, association boards should plan now to confirm their long-term investment approach. In recent years, many associations have sought higher returns by taking on greater risk in their portfolios, either by increasing allocations to equities or swapping high-quality debt for higher-yielding instruments, such as junk bonds and real estate investment trusts. That higher level of risk, while beneficial in times of low volatility, can also increase the likelihood of larger drawdowns when volatility emerges.

Investment committees should review their goals and reassess their asset allocation, at least annually, to align with the organization’s specific financial situation and risk tolerance. The lesson of the market’s reaction to the Brexit vote is that volatility may well have returned to financial markets. Associations would be wise to reassess and confirm their risk tolerance and investment allocations in the context of the business conditions they anticipate in the next few years.

Appropriate financial and investment planning will ensure that your association can thrive for years to come.

This article originally appeared on ASAE Center >>