How to Manage Your Investment Portfolio’s Safety, Liquidity, and Yield

The slogan “Safety First” can usually be found on a sign hanging in a manufacturing plant or construction site, but it’s just as appropriate on your desk as an investment officer of your credit union’s portfolio. The primary objective of an investment officer is to earn market rates, while preserving and protecting your capital. In other words, managing your investment portfolio with the three philosophical principles of safety, liquidity, and yield is fundamentally critical to understand. The interpretation of those three words is key to the success of each credit union, especially now, as investment portfolios grow and loan demand stagnates.

Understanding Risk

A well-planned investment policy statement can increase your chances of success with regards to safety and liquidity. Diversification is the most important factor in reducing risk. A good investment policy will have limitations on issuer, security type, and maturity terms, in order to keep the portfolio diversified; however, the biggest risk that credit unions face is fluctuating interest rates. Rising and falling rates involve risk, but a balanced portfolio can protect against both.

One good way to lessen the burden of interest rate risk is to diversify your maturities. If interest rates fall, longer-term investments will pay a nice yield and become more liquid in the portfolio with an increased potential for capital gains. If interest rates rise, you can invest the shorter-term maturities in higher interest rates when they become due. Mixing the portfolio with coupons that may rise, whether because the yield is tied to an index or steps up periodically, protects the overall yield of the portfolio. In other words, if you want to be safe and reduce your exposure to interest rate swings, have all your bases covered and diversify.

It cannot be said enough how diversification is the key to any respectable investment portfolio.

Staying Liquid

It’s been said that liquidity is like water, you don’t know its importance until you don’t have it. Liquidity has to be an overall philosophy, while safety is an underlying determinant. Knowing the right amount of liquidity needed, and when it’s needed, is key to maximizing yield and reducing portfolio risk.

If too little liquidity is in the portfolio, a forced sell of an investment in an untimely manner will lead to undue market risk. On the flip side, make sure the portfolio doesn’t have more liquidity than needed. In many portfolios, the problem isn’t having enough cash, but having too much cash that’s earning nothing.

Investment Strategy

An investment policy is the rulebook for your portfolio. It tells an investment officer about the need to be safe and liquid, but it doesn’t say how. The investment policy does not provide the investment strategy. Developing the right strategy for your credit union can be time consuming and daunting. A good strategy should include key elements, such as interest rate shift scenarios, staggering maturities, duration expectations, and when to modify a barbell or laddered strategy. If you aren’t sure how to put together a good investment strategy, or if you are looking to modify your existing plan, partner with a trusted investment professional who can help you develop a strategy that ensures your portfolio is maximizing safety, liquidity, and yield.

To learn more, contact Marcel Theriot, Director of SWBC’s Institutional Brokerage and Investment Advisory, at 866-270-4873 or MTheriot@swbc.com.