Mark Dixon is the leader of the Plante Moran Financial Advisors in Southfield, Michigan.
Market volatility can cause financial trouble for an otherwise healthy association. While no one knows what the future will bring, the likelihood of a fluctuating market is higher these days. Here's how associations can plan ahead.
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.
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 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.
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.