Break Your Other Resolutions, But Don't Break These
Last year's economic conditions left many credit unions with an investment hang-over. However, 2004 could offer a lot more to cheer about.
The sounds of champagne corks popping last month are now turning into a steady buzz as the economy settles down and gets back to business. Now is the time to put your for New Year's resolutions to the test.
You may have already broken your exercise resolution, and your time-management resolution and even your weight loss resolution, but here are four investment resolutions to stick to:
1) Resist the temptation to invest long term during the trough of an interest rate cycle. The economy is poised for a slow and sustained recovery which should result in higher rates over the next few years. Chasing yield by investing in 10-to 15-year average-life maturities will hurt the credit unions' spreads down the road. Most credit unions' liabilities have a very short duration and loading up the portfolio with long-term investments will create an interest rate risk mismatch and an ensuing ALM nightmare.
2) Diversify your investment portfolio. Similar to your personal investment portfolio, it is wise to diversify your CU's investment portfolio so that you are not gearing that portfolio toward any single interest rate scenario. Diversifying the portfolio between non-callables, callables, amortizing and floating rate instruments will enable the portfolio to perform better over a wide range of interest rate scenarios.
3) Understand the investments that you are purchasing. For some, the array of investment options-such as callables and floaters-may seem confusing. For others, the names may not be the problem, it's the promise. Brokers should provide all the information that enables a credit union to make educated decisions on whether the investment is right for your credit union's balance sheet and appropriate for the current rate environment. Make sure you understand how a bond will perform under various interest rate scenarios and that you are comfortable with the bond under worst-case scenarios.
4) Obtain a competitive quote when buying or selling a security. It is possible to earn substantially higher yields on investments purchased and sold by obtaining quotes from several brokers before settling on and executing a trade-and NCUA requires it!
When you invest wisely in 2004, that can even make 2005 a happier New Year.
Zane Wilson is director of Investment Services at Southwest Corporate Investment Services, Dallas.