Should you invest Association funds in the stock market?

Some Associations pursue a conservative investment strategy with the money in its capital fund, invested in comparatively low-yield money-market accounts or certificates of deposit.

Some Associations take a more aggressive stance, investing at least some of their Associations funds in the stock market in the hope of realizing a higher rate of return.  

Should your Association consider investing some of its capital fund in the stock market? Or is the stock market always off-limits to association money? How else might an Association increase its rate of return?

'LEGAL RESPONSIBILITY' Investing capital funds in the stock market is not "off-limits" unless the governing documents expressly prohibit it. That said, we do not believe it is wise to risk the association's funds in this manner.

In everything that we’ve have been taught and have experienced, it is the fiduciary duty of the board to protect the association's assets and make conservative investments, exercise sound risk management, and ensure protection from any liability. The Board has a legal responsibility to the owners to ensure that the reserve funds are invested wisely and are available when needed. You cannot guarantee this if you invest in the stock market.

'YOU MAY LOSE' Associations should not play the stock market, because that is what they would be doing - "playing," or gambling, with association money. You may win, or you may lose.

Certificates of Deposit (or Money-market accounts) are a good, safe place to invest association money up to $100,000 or so. If we’re looking at larger sums of money, we suggest opening CDARS - Buy CDs from other banks up to $100,000 each, and stagger the maturity dates. This way, your money is safe and insured by the FDIC, and, at this time, you should be getting a much higher interest rate.

'A BAD IDEA'  Associations need to do a little research. First, what do state laws have to say on the subject? Some states have restrictions on the types of investments a community association can make. Second, what do the bylaws say on the subject? Most bylaws contain restrictions on the types of investments a community can make. Third, are there any restrictions imposed by the directors-and -officers liability insurance carrier? Any investment that goes sour could result in a lawsuit against the Board that the insurer might not cover.

Even if there aren't any restrictions, the Board of Directors should realize that the stock market-that is, shares of specific corporations-can be very risky, and it's a bad idea all the way around. A far safer investment that's often overlooked is Treasury bills and notes. They're backed by the full faith and security of the federal government, and the interest earned is exempt from state and local income taxes. When you factor in the interest lost to state and local income taxes, any other type of investment-even bank interest and certificates of deposit-can look much less attractive.